Circuit City Stores, Inc. Annual Report 2001

focus on the

customer

Years Ended February 28 or 29(Dollar amounts in thousands except per share data) 2001 2000 1999

CIRCUIT CITY STORES, INC.

Net Sales and Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $12,959,028 $12,614,390 $10,810,468Earnings from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . $ 160,802 $ 327,830 $ 211,470Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,871,333 $ 3,955,348 $ 3,445,266Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,356,483 $ 2,142,174 $ 1,905,130Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,555,580 $ 1,536,456 $ 1,430,710

CIRCUIT CITY GROUP

Net Sales and Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $10,458,037 $10,599,406 $ 9,344,170Earnings from Continuing Operations Before Inter-Group

Interest in the CarMax Group . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,238 $ 326,712 $ 234,984Earnings from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . $ 149,247 $ 327,574 $ 216,927Earnings per Share from Continuing Operations:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.73 $ 1.63 $ 1.09Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.73 $ 1.60 $ 1.08

Number of Circuit City Superstores . . . . . . . . . . . . . . . . . . . . . . . . 594 571 537

CARMAX GROUP

Net Sales and Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500,991 $ 2,014,984 $ 1,466,298Net Earnings (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,564 $ 1,118 $ (23,514)Net Earnings (Loss) per Share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.45 $ 0.01 $ (0.24)Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.43 $ 0.01 $ (0.24)

Number of CarMax Retail Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 40 31

All Circuit City Group earnings per share calculations have been adjusted to reflect a two-for-one stock split effective June 30, 1999. On June 16, 1999, DigitalVideo Express announced that it would discontinue operations. Results of continuing operations of Circuit City Stores, Inc. and Circuit City Group shown in thetables above exclude Digital Video Express. See notes to consolidated and group financial statements.

THE CIRCUIT CITY STORES, INC. COMMON STOCK SERIES INCLUDE:

Circuit City Group Common Stock (NYSE:CC). Circuit City is a leading national retailer of brand-name consumer electronics, personalcomputers and entertainment software. At the end of fiscal year 2001, the Circuit City business included 594 Superstores in 161 marketsand 35 Circuit City Express mall stores. The Circuit City Group also includes a retained interest in the equity of the CarMax Group. TheCircuit City Group includes Digital Video Express, which is now classified as a discontinued operation for financial reporting purposes.

CarMax Group Common Stock (NYSE:KMX). As the pioneer of the used-car superstore concept, CarMax is transforming automobileretailing with a friendly offer that delivers low, no-haggle prices, a broad selection and high-quality customer service. At the end offiscal year 2001, CarMax operated 40 retail units in 37 locations, including 33 used-car superstores and 22 new-car franchises.

IN THIS REPORT, WE USE THE FOLLOWING TERMS AND DEFINITIONS:

Circuit City Stores and Circuit City Stores, Inc. refer to the corporation, which includes the Circuit City retail stores and relatedoperations, the CarMax retail stores and related operations, and the company’s interest in Digital Video Express, which is classified as a discontinued operation.

Circuit City refers to the retail operations bearing the Circuit City name and to all related operations such as product service and itsfinance operation.

Circuit City Group refers to the Circuit City and Circuit City-related operations, the retained interest in the equity of the CarMaxGroup and the company’s interest in Digital Video Express, which is classified as a discontinued operation.

CarMax Group and CarMax refer to retail locations bearing the CarMax name and to all related operations such as its finance operation.

FORWARD-LOOKING STATEMENTS:

This report contains forward-looking statements, which are subject to risks and uncertainties, including, but not limited to, risks associ-ated with the development of new business concepts. Additional discussion of factors that could cause actual results to differ materiallyfrom management’s projections, forecasts, estimates and expectations is contained in the company’s SEC filings, including the CircuitCity Stores, Inc. “Management’s Discussion and Analysis” contained in this annual report.

Financial Highlights

1

At Circuit City and CarMax, our unremitting focus is on providing customers

with the shopping experience—the service, the information, the selection and the

value—that assures Circuit City is their first choice for consumer electronics and

CarMax is their first choice for used and new vehicles. In every facet of our

businesses, our Associates are committed to continuously enhancing our powerful

consumer offers…for the benefit of our customers and our shareholders.

customerfocus on the

2

Even though we accomplished a great deal, we werenonetheless disappointed with our financial results. Forfiscal 2001, total sales for the Circuit City Group were$10.46 billion compared with $10.60 billion last year, andearnings from continuing operations for the Circuit Citybusiness were $115.2 million, or 56 cents per Circuit CityGroup share, compared with $326.7 million, or $1.60 pershare. Including the retained interest in CarMax, earningsfrom continuing operations for the Circuit City Groupwere $149.2 million, or 73 cents per Circuit City Groupshare, compared with $327.6 million, or $1.60 per share.

Sales Environment. Although we started the year withhealthy growth in virtually all product categories, by latein the first quarter we had already begun to see widevariations in monthly sales performance. The one consis-tent trend throughout the year was the strong growthpace for new and digital products relative to more tradi-tional products, which were particularly vulnerable torapid declines in average retails. Exciting growth cate-gories included digital televisions; DVD players; digitalimaging; computer software, accessories and peripherals;new video game platforms; and entertainment software.During the first half of the year, our appliance businesswas characterized by weakening growth, the entry ofsignificant competition and below-average operatingmargins. These trends led to our exit from the businessbeginning in late July. Many of the growth categoriesbenefited from the expanded space made available byour exit from the major appliance business. After astrong first half, the desktop PC business softened industry-wide during the second half.

Customer-Focused. We went into this sales environmentwith an intense focus on the consumer. Our Circuit CitySuperstores always have excelled at introducing newtechnologies. Our longtime emphasis on product-knowledge-based sales training and the strength of our interactivein-store demonstrations have enabled us to build astrong brand identity with consumers seeking productinformation. Nevertheless, our segment today includesnumerous traditional products with which the consumerneeds little assistance. Lower prices and product familiarityallow consumers to self-select these items. Recognizingthat we need to adapt as consumer preferences change,we entered the year with a new store design that makesit easy for consumers to shop the way they want toshop—with or without sales counselor assistance andwith a layout that invites browsing throughout the store.

By focusing on the customer, Circuit City Stores, Inc. hasbuilt a high-volume consumer electronics business thatexcels at bringing new, often complex, products to themarketplace and developed an automotive retail businessdifferentiated by its ability to sell high-quality used cars in a consumer-friendly way.

CONSOLIDATED RESULTSCircuit City Stores, Inc. reported consolidated sales of$12.96 billion for the fiscal year ended February 28, 2001,compared with $12.61 billion in fiscal 2000. Earnings fromcontinuing operations were $160.8 million compared withlast year’s $327.8 million.

CIRCUIT CITY BUSINESS REVIEWIn fiscal 2001, our Circuit City business operated in a chal-lenging retail environment that included an erratic salespattern during the first half of the year and a significantsoftening across virtually all product categories during thesecond half. In this environment, we undertook a numberof initiatives to better prepare our company for the future.These initiatives included:

● a major design change that was rolled out in 23 newand 26 fully remodeled Superstores;

● exiting the appliance business and fully remerchandisingthe vacated appliance space to include new and expandedselections in key consumer electronics categories; and,

● upgrading key, technology-focused merchandise displaysin all stores.

W. ALAN McCOLLOUGH

lettermanagement

3

including rate plans, available online from a brick-and-mortar retailer. Equally important, we enhanced the siteand added customers while also maintaining high standards for customer service. Even during the peak hol-iday season, all orders for in-stock merchandise receivedby 1:00 p.m. Eastern time were shipped the same day,and the site was available to consumers more than 99percent of the time.

The Challenges Ahead. I feel good about what we haveaccomplished, but believe there remains much yet to do.The cost of last year’s full remodels and the business dis-ruption to the existing store environment were notacceptable. And, although customers in these stores havegiven us great reviews, with the sales and economicuncertainty experienced at the end of the year, it is difficultto immediately measure the results of our investment. Infiscal 2002, we expect to open 15 to 20 new stores andrelocate approximately 10, all of which will follow lastyear’s design. However, we will limit our remodels to 20to 25 and refine the design so that it is less costly andless disruptive.

We also will direct significant attention to marketingprograms that cost effectively communicate the changeswe have made. We have added new leadership to our mar-keting team and believe that the combination of talent andexperience we now have will give creative life to ouradvertising initiatives.

Circuit City’s financial strength has been driven notjust by our consumer offer, but also by our ability todeliver the offer consistently and efficiently. In additionto the changes in our store design, we began in fiscal2001 to roll out Internet-based sales training programsfor all our store Associates. We plan to expand thistraining method to more product categories in the coming fiscal year.

Given the challenging retail climate, we will even moreclosely examine our operating practices. Specifically, weare undertaking initiatives to:

● further tighten inventory management, includingenhancing our forecasting tools, so that we reduceinventory in the distribution system and increaseinventory turnover while also maintaining high in-stock positions in the stores;

● apply the Six Sigma methodology to critical processesso that we measurably increase customer satisfactionwhile also reducing costs; and,

The more contemporary shopping experience includesshopping carts and a bank of cash registers at the frontof the store, brighter lighting, more colorful signs, moreopen space and improved product adjacencies. Duringthe year, we fully remodeled 26 stores, primarily in southand central Florida, to reflect this design, and we opened23 new stores that follow this concept.

The new design excluded major appliances, allowingus to dramatically increase our selection of faster grow-ing, more profitable consumer electronics and homeoffice products. Our original intent was to test a free-standing appliance store. However, as appliance salessoftened and competition intensified, we decided to exitthat category and remerchandise the appliance space inall remaining Superstores. That exit cost us approximately29 cents per share, including one-time exit costs, appli-ance merchandise markdowns, the appliance spaceremodeling expenses and sales disruption. But, I believeit was the right decision for Circuit City. This move pro-vided the needed space to quickly expand selections ofdigital imaging products; computer software, peripheralsand accessories; video game hardware and software;DVD movie titles; and telecommunications products.

In addition to the full and the partial remodel programs,we continued to enhance other areas of the Circuit Cityshopping experience. During the first half, we added displays for Internet accessibility, digital memory devicesand digital video and audio to virtually all stores. Weexpanded our wireless displays to include four providersin most markets, strengthened our ability to demonstratethe high-quality image available via digital television andexpanded our broadband offering to include moreproviders than any other retailer.

We also continued to develop our e-commerce site, thefirst launched by a national brick-and-mortar consumerelectronics specialty retailer. In fiscal 2001, we addedmore than 1,000 consumer electronics and home officeproducts, bringing to 2,400 the number of products weoffer for sale on the Web. And, in an agreement withAlliance Entertainment, we gave CircuitCity.com cus-tomers seamless access to Alliance’s selection of morethan 250,000 entertainment software titles. Early in theyear, we became the first consumer electronics retailer toprovide access to Web warehouse inventory through ourin-store point-of-sale system, and at year-end, webecame the first to offer 360-degree views of products.We also added online sales of wireless phones and themost extensive wireless communications information,

4

● leverage our longstanding information systems advan-tages to speed customer transaction times and createadditional informative in-store product demonstrationsthat help customers through their purchase decisions.

We expect that, for our Circuit City business, fiscal2002 will be a challenging year with an unpredictablesales and earnings climate. In this environment, we mustmake decisions that undergird our longer-term financialperformance. We must remain focused on our customersand continue taking steps to stay competitive and up-to-date with consumer preferences. We must analyze all ourprocesses to ensure all activity is productive. Althoughwe expect our earnings will be disappointing in fiscal2002, we believe that by completing these short-terminitiatives, we can improve our returns over a more sustained period.

Leadership Advances. I am especially pleased with themanagement team we have in place to guide our deci-sions. Last year, several promotions and additions furtherstrengthened this team. John Froman was promoted toexecutive vice president—merchandising. John joinedCircuit City’s store operations in 1986, was named presi-dent of our Central operating division in 1994 and seniorvice president—merchandising in 1997. Ann-MarieAustin-Stephens was promoted to senior vice president—store innovation and development. Ann-Marie joinedCircuit City in 1999 as vice president—strategic planning,following an extensive career in marketing, strategy andproduct development. In November 2000, Fiona Diasjoined Circuit City as senior vice president—marketing,bringing with her broad brand management and marketingexperience. Ed Brett was named president of the Northeastoperating division. Ed began his Circuit City career inhuman resources in 1989, became vice president—Superstorehuman resources and training in 1998 and from 1999until his promotion had served as a division manager andthen regional vice president.

CARMAX BUSINESS REVIEWWhen we began exploring the CarMax business in 1991, we approached it with the same consumer focus that hadgenerated success for Circuit City. Even today, researchconsistently acknowledges widespread consumer dissatis-faction with the automobile-buying experience. Our goalis to offer an alternative, especially for the purchase ofhigh-quality used cars. We have hit bumps along the way,particularly during the 1997 to 1998 period when werapidly expanded and added megastores to our mix.However, our standard-format store has achieved a highdegree of success in all markets and our megastore in themulti-store Washington, D.C., market ranks as the top-performing used-car sales location in the nation. In fiscal

2001, we consistently exceeded our sales expectations andsignificantly exceeded our earnings expectations. Thesales strength continued through the fourth quarter, com-pared to healthy sales growth in last year’s fourth quarterwhen CarMax saw the exit of a significant competitorfrom the business.

In fiscal 2001, CarMax sales increased 24 percent to$2.50 billion from $2.01 billion in fiscal 2000. Net earn-ings rose to $45.6 million from $1.1 million. Net earn-ings per CarMax Group share were 43 cents comparedwith 1 cent in fiscal 2000. Net earnings attributed to theCircuit City Group Common Stock were $34.0 million infiscal 2001 compared with $862,000 in the prior year.

We achieved this profit level, in part, by focusing onthe used-car segment. In the United States, sales of late-model used cars, which comprise the majority of CarMax’sused-car sales, total approximately $250 billion annually.More than 85 percent of CarMax’s unit sales are usedvehicles. Unlike new cars, each used car is unique. Byfinding the best mix of top-quality used cars, recondition-ing them to a high standard and guaranteeing them for aperiod after the sale, CarMax is able to add value for theconsumer and earn a higher return per car sold.

Customer-Focused. CarMax sales are driven by a differen-tiated consumer offer that enables each sales consultantto focus on the needs of the consumer rather than theprofit of the deal. It starts with low, no-haggle prices onthe vehicle, the financing and the extended warranty.Trade-ins also are handled as a separate no-haggle trans-action, including a written appraisal offer good with orwithout a purchase. We typically offer a broad selectionof 250 to 400 high-quality used vehicles per superstore.Each vehicle has been thoroughly inspected and recondi-tioned to meet CarMax’s mechanical, electrical, safety andcosmetic standards. Used vehicles include a five-day,money-back guarantee and a limited warranty. On-siterepair service also is available for all vehicles.

In fiscal 2001, we refined our television advertising toemphasize more strongly the aspects of the offer that are most important to consumers, and we doubled the frequency of our advertising while lowering its cost. Ouradvertising also helped to increase awareness and drivesignificant additional traffic to CarMax.com, our Web site.Surveys conducted during the year showed that more than40 percent of consumers who visited a CarMax store firstvisited CarMax.com. Late in fiscal 2000, we increased thefunctionality of CarMax.com, adding photographs andcomplete specifications on every car in CarMax’s 12,000-vehicle inventory and enabling consumers to easily compare prices and features on selected cars and to estimate trade-in values. In fiscal 2001, we introduced anew site design and continued to enhance functionality,

5

adding tax, title, tag and document fee information andthe ability to receive insurance quotations.

The numbers prove that consumers like what CarMaxhas to offer. With an average of 4,000 used cars sold perstore, CarMax’s fiscal 2001 store volumes were more thanthree times the combined new- and used-car volume ofthe average new-car dealership. New-car dealers, who sellmore than 85 percent of late-model used cars, constituteour primary competition.

Profit Driven by Execution. Sales are not the only driverof profits. Profitability is enhanced by:

● purchasing and inventory management systems:We must purchase large volumes of used cars—one ata time. To accomplish this task, we have developedunique training programs for our buying team andproprietary databases that track each car’s purchaseprice and activity, from the point of purchase to itssale at retail. These systems enable us to measure our performance and continuously hone our buyingskills. Our integrated inventory management systemfurther helps ensure that we have the right cars in theright location at the right time, providing historicalstatistical data about which makes and models sell atwhich locations during which months.

● efficient and high-quality reconditioning: CarMax’sunique, systematic reconditioning process is critical toguaranteeing high quality at low cost. A methodical,sequenced procedure brings every CarMax used car upto our exacting mechanical, electrical, safety and cosmetic standards. Through process engineering, wehave reduced the average reconditioning time per carby approximately 35 percent over the last two years.

● effective store operations processes: The consumeroffer and operating processes are identical in all stores.Company-wide integrated information systems supportcost efficiencies, consistent execution across all storesand continuous operational improvement. Managementdevelopment and store Associate training reinforceCarMax’s distinct methods to ensure that we deliverhigh levels of customer satisfaction.

Growth Opportunities. With a year of solid profitabilitybehind us and an expectation for sustained profitablegrowth, we plan to resume our geographic expansion.Our focus for the next several years will be on single-store markets and satellite fill-in stores in our multi-store markets, both of which we believe offer the lowestrisk, highest return growth opportunities. Single-storemarkets typically are mid-sized cities with populations of 1 million to 2.5 million people. In fiscal 2002, CarMaxplans to enter two single-store markets—Sacramento, Calif.,and Greensboro, N.C.

Beyond fiscal 2002, we expect to gradually increase theexpansion pace. We currently expect to open four to sixstores, including satellites, in fiscal 2003. Adding satellitefill-in stores extends the CarMax consumer offer intounderserved trade areas in our existing metro markets andleverages our operations and advertising in those markets.

We look forward to continuing sales and profit growthfrom CarMax, enabling us to fulfill the return on invest-ment opportunities envisioned when we launched thebusiness in 1993.

Leadership Recognition. Austin Ligon, president of CarMax,and the entire CarMax team have made considerableprogress developing the CarMax offer and establishing astrong profitable base for growth. Last year, we were pleasedto announce the promotion of Tom Folliard to senior vicepresident—store operations. Early this year, he became exec-utive vice president—store operations. Tom joined CarMax in1993 as senior buyer and was an early member of the used-car superstore development team. He became director ofpurchasing in 1994 and, since 1996, had served as vicepresident—merchandising. Tom played the key leadershiprole in the development of CarMax’s buying and inventorymanagement team and system.

Only our outstanding team of Circuit City Associatescould have met the challenges Circuit City faced in fiscal2001, and the great year enjoyed by CarMax followed yearsof tenacious work by the CarMax team. I am proud to beworking with these Associates, and I thank them and theirfamilies for the sacrifices they make for our company on adaily basis. I also thank our customers, our vendors, ourboard of directors and our shareholders for their support.

W. Alan McColloughPresident and Chief Executive OfficerCircuit City Stores, Inc.April 2, 2001

customer- shopping

defined

6

“NEW TRAINING PROGRAMS AND NEW

DISPLAYS REFLECT OUR DETERMINED

COMMITMENT TO PROVIDE CON-

SUMERS THE INFORMATION THEY NEED

TO BUY NEW TECHNOLOGIES. AT THE

SAME TIME, OUR EXPANDED SELECTIONS

AND NEW STORE LAYOUTS ENCOURAGE

MORE BROWSING IN ALL AREAS.”

RICHARD BIRNBAUM

EXECUTIVE VICE PRESIDENTOPERATIONS

“WE WANT CUSTOMERS TO BE

DELIGHTED WITH THEIR CIRCUIT CITY

SHOPPING EXPERIENCE…TO FEEL THE

MOMENT THEY WALK INTO THE

STORE THAT THIS IS WHERE THEIR

NEEDS WILL BE MET.”

ANN-MARIE AUSTIN-STEPHENS

SENIOR VICE PRESIDENTSTORE INNOVATION AND

DEVELOPMENT

The success of any retail superstore has historicallystemmed from its focus on customer service, broadproduct selections, low prices and continued satis-faction after the sale. This value equation holdstrue today. However, the definition of its variouscomponents has evolved as consumers and, in ourretail segment, the products have evolved.

The consumer electronics and home officecategories include a broad array of traditionalproducts—VCRs, portable audio, small-screentelevisions—with which the consumer is alreadyfamiliar and that sell at relatively low averageretails. It includes deep selections of entertain-ment software—movie titles, music and videogames. At the same time, we are adding newand more complex technologies at a rapid rate.At Circuit City, we are adapting our store to thenew dichotomy in our product lines and to thechanges in consumer buying behavior so thatwe continue to serve the needs of a broad cus-tomer base. Today, Circuit City customers findthe same knowledgeable sales assistance uponwhich they have always relied, but they alsofind more products quickly accessible on thefloor with more cash registers for easier check-out. And, ensuring that we cover all consumershopping preferences, we were the first nationalbrick-and-mortar specialty retailer to sell con-sumer electronics over the Internet.

Our new and fully remodeled Superstores aredesigned completely around today’s consumer.The store’s contemporary look and brighterlights and colors reflect the energy of our productcategories. The open floor plan is simple to nav-igate so that customers can find help if theyneed it or browse and select their products asthey prefer. Shopping carts and baskets and cashregister checkouts at the front of the store createa comfortable shopping environment for “take-with” products. With our exit from the appliancebusiness, we were able in all stores to add cashregisters and place more products on the floor.Improved product adjacencies in the new storedesign enable our commissioned sales Associatesto easily demonstrate related products and helpcustomers compare features and benefits acrossmodels. Hourly store Associates help to ensurethat product displays are adequately stocked atall times.

Finally, we recognize that the Web has addedan exciting dimension to retail shopping. Itenables consumers to learn about and purchaseproducts 24-hours-a-day, seven-days-a-week.Since launching our site in July 1999, we havemaintained a tight integration with our stores. Inall stores, sales Associates can access the Webstore inventory through the point-of-sale systemand order merchandise not available at the store.We have continued to add products and featuresto the site since its launch. We view CircuitCity.comas an integral part of our efforts to provide con-sumers with information and make it easy forcustomers to shop the way they want to shop.

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C I R C U I T C I T Y

Today, Circuit City customers find the same knowledgeable sales assistance upon which

they have always relied, but they also find more products quickly accessible on the

floor and conveniently located cash registers for easy checkout. And, we were the first

national brick-and-mortar specialty retailer to sell consumer electronics over the Internet.

8

“OUR WEB-BASED TRAINING

PROVIDES TECHNOLOGICAL KNOW-

HOW TO OUR STORE ASSOCIATES AT

A PACE THAT MIRRORS TODAY’S

RAPIDLY CHANGING CONSUMER

ELECTRONICS PRODUCT OFFERINGS.”

JEFF WELLS

SENIOR VICE PRESIDENTHUMAN RESOURCES

We have added new ways for the consumer toshop, but also maintained our emphasis on providing the comprehensive information neededto purchase many consumer electronics andhome office products. Our long-standing commit-ment to product-knowledgeable sales assistancedistinguishes Circuit City from all our signifi-cant competitors.

Delivering on that commitment requires contemporary sales training programs. AllCircuit City store Associates complete trainingmodules focused on customer service and storeprocedures. Sales training includes initial andongoing product modules to ensure that salesAssociates can answer questions on even the latest products. In fiscal 2001, we began movingfrom classroom training to Internet-based training courses. C-learning is more user-friendly

to today’s sales Associates, who are familiarwith the layout of Internet pages. Equallyimportant, the Internet gives us a way to morequickly and more efficiently deliver informationon fast-changing technologies to our storeAssociates and ultimately to the consumer. Infiscal 2002, we expect to add more productmodules as well as introduce managementdevelopment courseware.

We continue to reward our sales Associateswith incentive compensation. This compensationstructure recognizes the value they add to theshopping experience for consumers seeking in-store information. It also helps us to attractAssociates who value customer service and havea keen interest in the products we sell.

In addition to sales Associate training, wefocus significant resources on in-store productdisplays and demonstrations. At the digitalimaging displays in our new and fully remodeledstores, customers learn how to take digital stillphotos, upload them to a personal computer ande-mail them to family and friends or make high-quality prints. Our digital television displayprovides a vivid comparison between a big-screen, analog television and various digital display devices. Speaker sound rooms and caraudio/video product rooms enable consumers to compare systems. In the home office area,customers can see demonstrations of various

comprehensive

information

“CIRCUIT CITY IS FIRMLY COMMITTED

TO IN-STORE SYSTEMS THAT CREATE

A FAST, EASY, INFORMATIVE SHOPPING

EXPERIENCE. E-COMMERCE, WITH

IN-STORE PICK-UP, AND THE PLANNED

LAUNCH OF BROADBAND STATIONS

EXEMPLIFY THIS COMMITMENT.”

DENNIS BOWMAN

SENIOR VICE PRESIDENT ANDCHIEF INFORMATION OFFICER

9

C I R C U I T C I T Y

Internet access technologies, including the speedof broadband. And, in our new video gamedepartments, they can play with the full range ofgame platforms.

Finally, we believe the Internet is becoming amore important information source for today’sconsumer. CircuitCity.com provides a wealth ofinformation on more than 2,600 products, notjust those available for sale on the site.Consumers can compare side-by-side thefeatures and benefits of specific prod-ucts, and in fiscal 2001, we added360-degree views of more than 500products. In the new year, wewill continue to add informa-tion and expand 360-degreeviews to more products.

Product-knowledgeable sales assistance distinguishes Circuit City from all our

significant competitors. In-store product displays and demonstrations help our

customers learn about the benefits of technology, and CircuitCity.com provides

a wealth of information on more than

2,600 products.

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“IN FISCAL 2002, WE WILL FOCUS

ON BUILDING MARKET SHARE IN

THE PROFITABLE TECHNOLOGIES

THAT WE BELIEVE WILL DRIVE

INDUSTRY GROWTH DURING THIS

DIGITAL DECADE.”

JOHN FROMAN

EXECUTIVE VICE PRESIDENTMERCHANDISING

“ADVANCES IN SUPPLY CHAIN

MANAGEMENT CAN HELP REDUCE

INVENTORY IN WAREHOUSES WHILE

MAINTAINING OR EVEN IMPROVING

THE STORES’ ALREADY SOLID

IN-STOCK LEVELS. WE ARE TARGETING

IMPROVED RETURNS WITH REDUCED

INVENTORY INVESTMENT AND

DISTRIBUTION COSTS.”

GARY MIERENFELD

SENIOR VICE PRESIDENTDISTRIBUTION AND NATIONAL SERVICE

We recognize that consumers purchasing big-ticketitems often shop multiple retailers. Nevertheless,we strive to provide an experience that enablesthem to shop only at Circuit City for a broad,feature-rich selection of name-brand consumerelectronics and home office products.

Our merchandising team provides a selectionthat includes a variety of brands, features andprice points. The selection extends from the basicentry-level products to the highest-quality tele-vision available for your family or media room.You can grab a replacement VCR or learn aboutnew digital television products. We were one ofthe first national retailers to introduce DIRECTVand one of the first to introduce CableLabs-certified DOCSIS modems. In fiscal 2001, wehelped introduce new ways to access the Internet—from your wireless phone, your handheld computeror even your television. And, we expanded ourwireless communications selection to includeoptions from four major carriers in most markets.

We are careful, however, to not offer selectionthat provides no distinguishing value for the con-sumer. As products become similar in the featuresoffered, we adjust our selection to help simplifythe customer’s purchase decision. Today, forexample, we carry only about 15 VCR models versus approximately 50 five years ago. Thesereductions free space for other products that havea greater variety of features across models.

Our new store design and our exit from theappliance business allowed us to dramaticallyexpand our selections in many categories duringfiscal 2001. Now, our typical Superstore displaysapproximately 1,000 computer software titlescompared with only about 50 previously. Weincreased the selling square footage for computerperipherals and accessories by 70 percent. We

extended our digital camera and accessories selec-tion, allowing us to meet high demand over theholidays, and added 35mm cameras. We doubledour DVD movie offering, expanding from an aver-age of 2,500 titles to an average of 5,000 titles inall stores. And, we added a full assortment ofvideo game platforms, including hardware andsoftware. We will continue to expand our videogame selection as developing platforms areintroduced in the new year.

Finally, our e-commerce team mirrors thestore’s focus on selection. More than 2,400products are available for purchase on the Website, including approximately 115 televisions, 45 digital cameras and 20 notebook PCs. CircuitCity Web customers can purchase products onlinefor delivery to their home or check inventory atup to three stores, purchase the products onlineand pick them up from the store at their conve-nience. In addition, the Web site enables us to offerspecial selections of product line extensions onlyavailable in limited supply. It further expands thestores’ inventories by providing access to thesemore limited quantities as well as to the full Webstore warehouse inventory. And, CircuitCity.comcustomers now have access to more than 250,000music and movie titles through our agreementwith Alliance Entertainment.

selectionoptimal

11

C I R C U I T C I T Y

Circuit City provides a broad, feature-rich selection of name-brand consumer electronics

and home office products. In fiscal 2001, we dramatically expanded our selections in

computer software, peripherals and accessories; digital and 35mm cameras and

imaging accessories; DVD movies; and video game hardware and software.

12

“WE’RE CHANGING OUR STORES

TO MATCH CHANGED CONSUMER

SHOPPING PREFERENCES. WE MUST

ALSO CHANGE OUR ADVERTISING

TO REACH TODAY’S CONSUMER,

GIVING IT THE SAME FRESH

APPROACH WE’RE INTRODUCING

IN OUR STORES.”

FIONA DIAS

SENIOR VICE PRESIDENTMARKETING

customers trust

At Circuit City, we believe that for today’s con-sumer, value is critical to an outstanding shoppingexperience. Value includes not only extensiveproduct information and a vast product array, butalso low prices and satisfaction after the sale.

As a primary shopping destination, our storesmust offer competitive pricing with all majorretailers in our categories. Our Web pricing mustbe competitive with available product from othermajor e-tailers and with our stores. We activelyshop the competition and continuously enhanceour inventory management systems to improveforecasting and reduce inventory carrying anddistribution costs, all as part of our efforts tokeep prices low. Finally, we offer a low priceguarantee at all stores, and customers buyingonline and picking up products at the storeautomatically receive the lower of the Webprice or the in-store price.

But to maintain our relationship with the con-sumer, we also must continue our commitment toservice and satisfaction after the sale is complete.That commitment includes competitive returnpolicies, home delivery for larger items, installa-tion for items such as DIRECTV, and in-shop andin-home product repair. For in-shop repair, cus-tomers simply bring a product to the most conve-nient Circuit City Superstore, and we send it toone of our 23 regional repair centers.

CircuitCity.com customers also receive superiorafter-the-sale service. Products purchased online

for home delivery are shipped the same day if theorder is received before 1:00 p.m. Eastern time or the following day if after 1:00 p.m. Customere-mails are responded to within 24 hours ofreceipt. We now have operated the site throughtwo peak selling seasons and have set the stan-dard, meeting our shipping and e-mail responsecriteria more than 99 percent of the time. Andfinally, unlike pure-play e-tailers or brick-and-mortar retailers without fully integrated sites, anyproducts, whether they are picked up at the storeor delivered to the home, may be returned orexchanged at any Circuit City Superstore.

During fiscal 2001, we made significantchanges to the Circuit City consumer offer, exitingthe appliance business to focus on the morepromising consumer electronics and home officecategories, adding more “take-with” selection toall stores and introducing a store environmentthat is more contemporary and more conducive tobrowsing as well as to finding and learning aboutnew technologies. And yet, we kept the underly-ing principles of our value equation—exceptionalcustomer service, a broad product selection, lowprices and satisfaction after the sale. In fiscal2002, we will maintain our focus on customerswhile we continue refining the store design aswell as the operating and management informa-tion systems that support our consumer offer. Ourobjective, as always, remains to achieve the bestreturns we can for Circuit City shareholders.

value

13

C I R C U I T C I T Y

At Circuit City, we are committed to providing the value that is critical to an out-

standing shopping experience—extensive product information, a vast product array,

low prices and satisfaction after the sale—in an environment that lets customers

shop the way they want to shop.

14

An overriding focus on the customer also drivesthe success of our CarMax used-car superstores.They must offer the same value—exceptional customer service, broad selection, low prices andcontinued satisfaction after the sale—that character-izes successful specialty superstores nationwide.CarMax’s pioneering consumer offer is unmatchedin automobile retailing.

CarMax has been a hit with the consumersince the day the first store opened in Richmond,Va., in 1993. In our first year, the Richmondstore’s used-vehicle sales were higher than thecombined used- and new-vehicle sales of anynew-car dealer in the Richmond market. Today,the average used-car sales of our 33 CarMaxused-car superstores are more than three times thenational new-car-dealer averages for new- andused-car sales combined, and our largest super-store in Laurel, Md., sells nearly eight times thataverage. Over the past eight years, we have furtherrefined the consumer offer, strengthened our oper-ating skills and capacity, and honed our ability todeliver CarMax’s value equation consistentlyacross all stores on a daily basis.

One of the keys to our customer focus is theCarMax sales consultant. These consultantsreceive the same commission amount for everycar they sell. Pricing on vehicles, financing andwarranties are set at low, no-haggle levels, andtrade-ins are handled as separate no-haggle trans-actions. These incentive and pricing policiesenable the sales consultant to focus solely on the

customer’s needs rather than negotiating the best“deal” for the dealership. Whether buying a luxuryvehicle or a sub-compact, the CarMax customerreceives the same help and attention.

In addition, the sales consultant is able to assistthe customer at every stage of the buying process,from selection and test driving, through the trade-in appraisal and sale, and sign-ups for financingand extended warranty plans. Our proprietary,enterprise-wide information system facilitates andspeeds the shopping process. It allows the salesconsultant and customer to instantly check system-wide inventory information, price an extendedwarranty or submit an application for financing.Qualified customers receive online financingapproval on primary credit financing from eitherCarMax Auto Finance, Bank of America, or both,typically in less than five minutes. Sub-primefinancing is provided through the system by avariety of third-party lenders.

CarMax also provides a customer-defined shop-ping experience on the Web. While most used-carcustomers prefer to view and test drive theseunique vehicles, CarMax.com provides comprehen-sive information on our entire vehicle inventory.Both used-car and new-car customers can contactdedicated “eOffice” consultants online viaCarMax.com, by telephone or by fax. Customerscan work with these eOffice sales consultants fromthe comfort of home—including applying forfinancing—and need only visit the store to sign thepaperwork and pick up their vehicle.

customer- shopping

defined“IN FISCAL 2001, CARMAX’S UNIQUE

CONSUMER OFFER AND OPERATIONAL

CONCEPT BEGAN TO DELIVER THE

PROFITABILITY ENVISIONED WHEN THE

BUSINESS WAS LAUNCHED, AND NOW

WE LOOK FORWARD TO TAKING THE

CARMAX CONCEPT TO MORE MARKETS.”

AUSTIN LIGON

PRESIDENT

“COMPETITIVE FINANCING IS A KEY

COMPONENT THAT MAKES THE CARMAX

OFFER WORK FOR THE CUSTOMER.”

ANGIE SCHWARZ

VICE PRESIDENTCARMAX AUTO FINANCE

“CARMAX SALES CONSULTANTS TAKE

THE CUSTOMER THROUGH THE ENTIRE

BUYING PROCESS, FROM VEHICLE

SELECTION THROUGH TEST DRIVING

AND FINANCING TO DELIVERY.”

TOM FOLLIARD

EXECUTIVE VICE PRESIDENTSTORE OPERATIONS

15

CarMax’s pioneering consumer offer is unmatched in automobile retailing:

low, no-haggle prices; a broad selection; guaranteed quality; and customer-

friendly service.

C A R M A X

CarMax further improves the car-buying experi-ence with easily accessible information on eachused and new vehicle in our inventory. Vehicleinformation that includes features, specifica-tions and the low, no-haggle CarMax price isavailable in-store via our automated touch-screen kiosks and online at CarMax.com. Bothsystems provide the comparative Kelley BlueBook price for used cars and the manufacturer’ssuggested retail price and the dealer invoice fornew cars. Inventory information on the morethan 12,000 vehicles available for sale is updat-ed daily on CarMax.com and instantaneously onour in-store system.

Customers visiting our stores are offered salesassistance when they enter the store, but alsoare free to roam the vehicle selections on theirown. Inventory is arranged by vehicle type—from subcompacts to light trucks and luxuryvehicles—and by make within each type. An easyway to sort through the vast inventory selectionis via our automated touch-screen terminals.Using these kiosks inside the store, customerscan search the inventory by price point or

vehicle make and model. After sorting, customerscan see side-by-side comparisons that includethe features, specifications and color photos ofthe selected vehicles. Once the customer selectsa vehicle of interest, the system prints aninformation sheet with a map showing thevehicle’s exact location on the CarMax site.

More and more consumers are researchingvehicle purchases on the Web before entering astore. Early on, CarMax laid the foundation withinformation systems that could be naturallyintegrated into a Web site, and in 1996, welaunched CarMax.com. CarMax.com allows consumers to search our entire used- and new-car inventory, including the prices of all vehicles.Consumers also can view financing and warrantyinformation, estimate monthly payments,approximate trade-in values and compare thefeatures and specifications of selected vehiclesside-by-side. In fiscal 2001, we introduced anew site design and added vehicle reviews, theability to estimate tax, title and tag fees and alink offering insurance quotes.

“OUR ADVERTISING AND MARKETING

MESSAGES EXPLAIN IN A STRAIGHT-

FORWARD, ‘NO-GAMES’ MANNER

HOW THE ELEMENTS OF THE

CARMAX OFFER DIFFER FROM THOSE

OF A TRADITIONAL DEALER.”

JOE KUNKEL

SENIOR VICE PRESIDENTMARKETING AND STRATEGY

“THE SYSTEMS CARMAX CUSTOMERS

SEE, IN OUR STORES AND ON THE

WEB, PROVIDE THE COMPREHENSIVE

INFORMATION THAT DISTINGUISHES

OUR CONSUMER OFFER; THE

OPERATIONAL SYSTEMS THEY DON’T

SEE HELP US SUCCESSFULLY DELIVER

OUR OFFER.”

MIKE DOLAN

SENIOR VICE PRESIDENT ANDCHIEF INFORMATION OFFICER

16

comprehensive

information

17

CarMax provides easily accessible information, including our low, no-haggle prices,

on each used and new vehicle in our entire inventory—in-store via automated touch

screens and online via CarMax.com.

C A R M A X

CarMax is a superstore for used cars. To achieveour volume objectives, we must offer a broadselection of vehicles that appeal to a large num-ber of consumers. Within each category, we alsomust offer a variety of makes and models sothat our customers have enough choices withouthaving to shop all over town.

Each CarMax used-car superstore offers nofewer than 250 vehicles, and typical inventoriesrange from 250 vehicles to 400 vehicles. At ourhighest volume locations, the selection rises toas many as 650 vehicles. Every CarMax super-store offers a wide selection representing allpopular makes and models, from subcompact,mid-sized and luxury cars to sport utilities,trucks and mini-vans. CarMax also offers consumers the option to transfer used vehiclesfrom any other CarMax location.

CarMax used cars are less than six years old,have fewer than 60,000 miles and generallyrange in price from $6,500 to $30,000. For the most cost-conscious consumer, we offerValuMax®, which are high-quality vehicles thatare more than six years old or have 60,000miles or more. They generally range in pricefrom $4,000 to $19,000.

Because these unique used vehicles cannot be purchased in bulk, delivering this broadselection requires special buying skills. First, tomake sure our selection matches consumer tastesin each market, we purchase most cars directlyfrom consumers in the market or at regionalauctions. We appraise any vehicle and offer to

purchase it from the consumer whether or nothe or she buys a vehicle from CarMax. Second,we provide extensive training for CarMax buyers.From their first day with us, buyers-in-trainingare mentored by experienced buyers. In class-room training, buyers learn how to evaluate aused car, as well as important in-store andbusiness operating procedures. But, the mostimportant education they receive is their on-the-job training. This training allows them toappraise thousands of vehicles and receive acritique on each appraisal made before makingtheir first solo purchase for CarMax.

In addition to our used-car superstores, weoperate 21 new-car franchises, most of whichare integrated or co-located with our super-stores. Brands represented include Chrysler,Dodge, Jeep, Nissan, Mitsubishi, Toyota, BMW,Chevrolet and Ford. At each franchise, CarMaxoffers the full selection of manufacturer’s models at no-haggle prices.

Maintaining CarMax’s superior selection alsorequires excellent inventory management skills.Our inventory management system tracks eachvehicle from its point of wholesale purchase toits sale at retail. Measuring the time a vehicleremains on our lot, tracking its purchase priceversus its ultimate retail sales price and trackingmovement of vehicles between locations helpsgenerate an efficient inventory turn ratio. Weare constantly using the information providedby this system to refine our buying skills, ourselection and our retail prices.

“SUPERVISED BY EXPERIENCED BUYERS,

OUR BUYERS-IN-TRAINING APPRAISE

THOUSANDS OF CARS BEFORE

MAKING THEIR FIRST SOLO PURCHASE

FOR CARMAX.”

CLIFF WOOD

VICE PRESIDENTMERCHANDISING

“AN AUTO PURCHASE IS A

DOCUMENT-INTENSIVE PROCESS.

OUR EFFICIENT ASSOCIATES AND

EFFECTIVE SYSTEMS MAKE THIS

PROCESS APPEAR SIMPLE AND

SEAMLESS TO THE CUSTOMER.”

FRED WILSON

VICE PRESIDENTSTORE ADMINISTRATION

18

selectionoptimal

19

CarMax is a superstore for used cars, with typical inventories ranging from 250

vehicles to 400 vehicles. In fiscal 2001, CarMax sold an average of 4,000 used cars

per superstore, more than three times the combined new- and used-car volume of

the average new-car dealership.

C A R M A X

Creating value for automotive consumers meansproviding top-notch customer service, a broadselection of vehicles and easily accessible productinformation. But, most of all, it means providinglow prices on high-quality vehicles. CarMaxdelivers the entire value equation.

On average, CarMax used cars are priced$1,500 below the Kelley Blue Book price. In fiscal2001, approximately 75 percent of our new carswere priced below dealer’s invoice. Every consumerreceives these low prices—without having tonegotiate. At CarMax, we extend no-haggle to allparts of the transaction. Consumers can receivewritten appraisals on any vehicle, and we willbuy their cars even if they don’t buy from us. Wealso set financing and warranty rates at low, no-haggle levels and offer customers a choice ofrates and terms when they are approved by morethan one financing source. Other automobileretailers may offer a good deal on the vehicle oreven advertise no-haggle pricing, but most thenvary the pricing on trade-ins, financing and war-ranties to earn back the margin lost on the vehicle.

The prices are low, but the quality is high.Every CarMax used car undergoes our rigorousCertified Quality InspectionSM. This comprehensiveinspection includes the engine, cooling and fuelsystem, drive axle, transmission, electronic systems,suspension, brake system, steering, air condition-ing, interior and optional equipment. ValuMax®must meet the same mechanical, electrical andsafety standards, but fewer cosmetic and optional

equipment standards. Vehicle inspections arecompleted systematically by CarMax mechanics,most of whom are A.S.E.-certified. Fewer thanhalf the cars we purchase from consumers meetthe CarMax retail standard; the remainder arewholesaled to other dealers at onsite auctions.

A five-day, 250-mile return guarantee and alimited 30-day warranty back every used car soldat CarMax. The majority of customers also chooseto purchase extended warranties that provide comprehensive mechanical protection for periodsranging from six months to 72 months. AllCarMax used-car locations provide vehicle repairservice, including warranty service. CarMaxextended warranty customers also have access to an additional 14,000 independent serviceproviders nationwide. Factory-authorized warrantyservice is available for all new cars at CarMaxnew-car franchises.

From the day we opened the doors, consumershave told us they like CarMax. Today, we operate37 locations and used cars account for more than85 percent of the vehicles we sell. We have refinedthe offer and strengthened the systems that supportit and our capacity to consistently deliver it. As weenter fiscal 2002, we are once again beginning toextend the CarMax offer to customers in newmarkets. As we engage in this expansion program,we expect that continuing to offer consumers“car-buying the way it should be” will producehealthy returns for our shareholders.

“OUR SERVICE TECHNICIANS KNOW

THAT WHETHER OR NOT A

CUSTOMER BECOMES A REPEAT

CUSTOMER DEPENDS ON THE QUALITY

OF OUR RECONDITIONING AND

SERVICE OPERATIONS.”

ED HILL

VICE PRESIDENTSERVICE OPERATIONS

“PAYING THE SAME FIXED DOLLAR

COMMISSION ON EVERY VEHICLE

ALLOWS OUR SALES CONSULTANTS TO

FOCUS ON FINDING THE RIGHT CAR

FOR THE CUSTOMER.”

SCOTT RIVAS

VICE PRESIDENTHUMAN RESOURCES

20

customers trustvalue

21

Creating value for automotive consumers means providing top-notch customer

service, easily accessible product information and low prices on high-quality

vehicles. CarMax delivers the entire value equation.

C A R M A X

22

2001 2000 1999 1998 1997 1996 1995 1994 1993 1992

CONSOLIDATED SUMMARY OF EARNINGS FROM CONTINUING OPERATIONS(Amounts in millions except per share data)

Net sales and operating revenues................ $12,959 $12,614 $10,810 $ 8,871 $ 7,664 $ 7,029 $ 5,583 $ 4,130 $ 3,270 $ 2,790Gross profit .......................................................... $ 2,795 $ 2,863 $ 2,456 $ 2,044 $ 1,761 $ 1,635 $ 1,385 $ 1,106 $ 924 $ 809Selling, general and

administrative expenses.............................. $ 2,515 $ 2,310 $ 2,087 $ 1,815 $ 1,499 $ 1,315 $ 1,105 $ 892 $ 745 $ 676Earnings from continuing

operations before income taxes................. $ 259 $ 529 $ 341 $ 202 $ 233 $ 295 $ 270 $ 209 $ 175 $ 124Earnings from continuing operations .......... $ 161 $ 328 $ 211 $ 125 $ 144 $ 184 $ 169 $ 132 $ 110 $ 78Earnings (loss) per share from continuing operations:

Circuit City Group:Basic......................................................... $ 0.73 $ 1.63 $ 1.09 $ 0.68 $ 0.74 $ 0.95 $ 0.88 $ 0.70 $ 0.59 $ 0.43Diluted ..................................................... $ 0.73 $ 1.60 $ 1.08 $ 0.67 $ 0.73 $ 0.94 $ 0.87 $ 0.69 $ 0.58 $ 0.42

CarMax Group:Basic......................................................... $ 0.45 $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ — $ — $ — $ — $ —Diluted ..................................................... $ 0.43 $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ — $ — $ — $ — $ —

CONSOLIDATED SUMMARY OF EARNINGS FROM CONTINUING OPERATIONS PERCENTAGES(% to sales except effective tax rate)

Gross profit........................................................... 21.6 22.7 22.7 23.0 23.0 23.3 24.8 26.8 28.3 29.0Selling, general and

administrative expenses.............................. 19.4 18.3 19.3 20.5 19.6 18.7 19.8 21.6 22.8 24.2Earnings from continuing operations

before income taxes..................................... 2.0 4.2 3.2 2.3 3.0 4.2 4.8 5.1 5.4 4.5Effective tax rate................................................. 38.0 38.0 38.0 38.0 38.0 37.5 37.5 36.7 37.0 37.0Earnings from continuing operations............... 1.2 2.6 2.0 1.4 1.9 2.6 3.0 3.2 3.4 2.8

CONSOLIDATED SUMMARY BALANCE SHEETS(Amounts in millions)

Total current assets .......................................... $ 2,847 $ 2,943 $ 2,394 $ 2,146 $ 2,163 $ 1,736 $ 1,387 $ 1,024 $ 791 $ 597Property and equipment, net........................... $ 989 $ 965 $ 1,006 $ 1,049 $ 886 $ 774 $ 593 $ 438 $ 371 $ 319Deferred income taxes..................................... $ – $ — $ — $ — $ — $ — $ 6 $ 79 $ 88 $ 68Other assets ....................................................... $ 35 $ 47 $ 45 $ 37 $ 32 $ 16 $ 18 $ 14 $ 13 $ 15Total assets....................................................... $ 3,871 $ 3,955 $ 3,445 $ 3,232 $ 3,081 $ 2,526 $ 2,004 $ 1,555 $ 1,263 $ 999Total current liabilities .................................... $ 1,292 $ 1,406 $ 964 $ 906 $ 837 $ 831 $ 706 $ 546 $ 373 $ 279Long-term debt, excluding

current installments................................... $ 116 $ 249 $ 426 $ 424 $ 430 $ 399 $ 179 $ 30 $ 82 $ 85Deferred revenue and other liabilities........... $ 92 $ 130 $ 112 $ 145 $ 166 $ 214 $ 242 $ 268 $ 232 $ 187Deferred income taxes..................................... $ 15 $ 28 $ 38 $ 27 $ 33 $ 18 $ — $ — $ — $ —Total liabilities.................................................. $ 1,515 $ 1,813 $ 1,540 $ 1,502 $ 1,466 $ 1,462 $ 1,127 $ 844 $ 687 $ 551Total stockholders’ equity.............................. $ 2,356 $ 2,142 $ 1,905 $ 1,730 $ 1,615 $ 1,064 $ 877 $ 711 $ 576 $ 448Total liabilities and stockholders’ equity...... $ 3,871 $ 3,955 $ 3,445 $ 3,232 $ 3,081 $ 2,526 $ 2,004 $ 1,555 $ 1,263 $ 999

CONSOLIDATED STATEMENTS OF CASH FLOWS FROM CONTINUING OPERATIONS(Amounts in millions)

Depreciation and amortization....................... $ 153 $ 148 $ 130 $ 115 $ 99 $ 80 $ 67 $ 55 $ 42 $ 36Cash flow from operating activities

of continuing operations........................... $ 156 $ 626 $ 319 $ 236 $ 26 $ (46) $ 51 $ 111 $ 163 $ 67Capital expenditures ........................................ $ 286 $ 222 $ 352 $ 576 $ 540 $ 517 $ 375 $ 252 $ 190 $ 110

OTHER DATACash dividends per share paid on

Circuit City Group Common Stock............ $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.06 $ 0.05 $ 0.04 $ 0.03 $ 0.03Return on average stockholders’ equity (%)..... 7.1 9.8 7.9 6.2 10.2 18.5 21.1 20.6 21.5 19.2Number of Associates at year-end................... 56,865 60,083 53,710 46,691 42,312 37,086 31,413 23,625 20,107 16,635Number of Circuit City retail units

at year-end.................................................... 629 616 587 556 493 419 352 294 260 228Number of CarMax retail units at year-end ... 40 40 31 18 7 4 2 1 – –

All earnings per share and dividends per share calculations for the Circuit City Group have been adjusted to reflect a two-for-one stock split effective June 30,1999. On June 16, 1999, Digital Video Express announced that it would discontinue operations. Results of continuing operations shown above exclude DigitalVideo Express. See notes to consolidated and group financial statements.

Selected Financial Data

ALABAMA AnnistonBirmingham (2)HuntsvilleMontgomeryTuscaloosa

ARIZONA Phoenix (8)Tucson (2)

ARKANSAS Ft. Smith (2)Little Rock (2)

CALIFORNIA BakersfieldChico/Redding (2)Fresno (3)Los Angeles (41)Palm SpringsSacramento (5)Salinas (3)San Diego (8)San Francisco (16)Santa Barbara (2)

COLORADO Colorado Springs (3)Denver (8)Grand Junction

CONNECTICUTHartford (4)

FLORIDA Fort Myers (3)Gainesville (2)Jacksonville (4)Miami (9)Orlando (7)Panama CityPensacola (3)TallahasseeTampa (9)West Palm Beach (5)

GEORGIAAlbanyAtlanta (16)AugustaColumbusMaconSavannah

HAWAII Honolulu

IDAHO BoiseIdaho Falls

ILLINOIS Champaign/

Springfield (3)Chicago (25)Peoria/

Bloomington (2)Rockford

INDIANA EvansvilleFort WayneIndianapolis (7)LafayetteSouth BendTerre Haute

KANSASKansas City (5)TopekaWichita (2)

KENTUCKY LexingtonLouisville (4)Paducah (2)

LOUISIANA Baton RougeLafayetteNew Orleans (4)Lake CharlesTexarkana/

Shreveport

MAINE BangorPortland

MARYLAND Baltimore (6)Salisbury

MASSACHUSETTS Boston (14)Springfield (2)

MICHIGAN Detroit (11)Flint (2)Grand Rapids (5)Lansing (3)Traverse City

MINNESOTAMinneapolis (9)

MISSISSIPPIBiloxiJacksonTupelo

MISSOURIColumbiaSt. Louis (7)Springfield

NEBRASKA LincolnOmaha

NEVADA Las Vegas (3)Reno

NEW MEXICOAlbuquerque

NEW YORKAlbanyBinghamtonBuffalo (3)New York (32)Rochester (3)Syracuse

NORTH CAROLINACharlotte (6)Greensboro (3)Greenville/

New Bern (2)Raleigh (5)Wilmington

OHIOCincinnati (6)Cleveland (9)Columbus (4)Dayton (3)Toledo (2)Youngstown (2)

OKLAHOMA Oklahoma City (2)Tulsa (2)

OREGONEugeneMedfordPortland (5)

PENNSYLVANIAErieHarrisburg (4)Johnstown (3)Philadelphia (14)Pittsburgh (5)Scranton/

Wilkes-Barre (3)

RHODE ISLANDProvidence (5)

SOUTH CAROLINA CharlestonColumbia (2)Florence (2)Greenville (4)

TENNESSEEChattanoogaJacksonJohnson CityKingsportKnoxville (2)Memphis (2)Nashville (5)

TEXASAbileneAmarilloAustin (3)BeaumontCorpus ChristiDallas/Fort Worth(10)El Paso (2)Houston (12)Lubbock McAllen/

Brownsville (2)Midland/Odessa (2) San Antonio (3)Tyler/Longview (3)Waco (4)Wichita Falls

UTAH Salt Lake City (5)

VERMONT Burlington

VIRGINIACharlottesvilleHarrisonburgNorfolk (7)Richmond (5)Roanoke (3)Winchester

WASHINGTONSeattle (9)Spokane (2)Yakima

WASHINGTON D.C.Maryland (8)N. Virginia (9)

WEST VIRGINIACharleston/

Huntington (2)Clarksburg (2)Wheeling (2)

WISCONSINAppleton/

Green Bay (2)Madison (2)Milwaukee (4)

WYOMINGCheyenne

CIRCUIT CITY MARKETS (as of 2/28/01)HIGH-LOW PRICES

Circuit City

CARMAX MARKETS (as of 2/28/01)

CALIFORNIALos Angeles (4)

FLORIDAMiami (3)Orlando (2)Tampa (2)

GEORGIAAtlanta (3)

ILLINOISChicago (6)

NORTH CAROLINACharlotteRaleigh

SOUTH CAROLINAGreenville

TENNESSEENashville

TEXASDallas/Fort Worth (5)Houston (4)San Antonio

VIRGINIARichmond

WASHINGTON, D.C./BALTIMORE (5)

1 2 3 4 1 2 3 4 1 2 3 41 2 3 41997 1998 1999 2000

1 2 3 42001

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

Common Stock PricesAs of February 28, 2001, there were approximately 8,600 holders of the Circuit CityGroup Common Stock and 535 holders of the CarMax Group Common Stock.

The first graph above shows the common stock trends for Circuit City Stores,Inc. Common Stock from March 1, 1996, through February 3, 1997, and the com-mon stock trends for Circuit City Stores, Inc.—Circuit City Group Common Stockfrom February 4, 1997, through February 28, 2001. The Circuit City Stores, Inc.Common Stock was redesignated as and, on February 4, 1997, began trading asCircuit City Group Common Stock. It includes a retained interest in the equity ofnewly issued Circuit City Stores, Inc.—CarMax Group Common Stock. Circuit CityGroup Common Stock prices have been adjusted to reflect a two-for-one stock spliteffective June 30, 1999.

The second graph shows the common stock trends for Circuit City Stores, Inc.—CarMax Group Common Stock from February 4, 1997, the first day it was traded,through February 28, 2001.

CERTIFIED PUBLIC ACCOUNTANTSKPMG LLPRichmond, Virginia

TRANSFER AGENT & REGISTRARWells Fargo Bank Minnesota, N.A.South St. Paul, Minnesota(800) 468-9716www.wellsfargo.com/com/shareowner_services

RIGHTS AGENTWells Fargo Bank Minnesota, N.A.South St. Paul, Minnesota

CORPORATE OFFICES9950 Mayland DriveRichmond, Virginia 23233-1464

WEB SITESwww.CircuitCity.comwww.CarMax.com

INVESTOR INFORMATION WEB SITEShttp://investor.CircuitCity.comhttp://investor.CarMax.com

ANNUAL MEETINGJune 15, 2001, 10:00 a.m.The Jefferson HotelFranklin and Adams StreetsRichmond, Virginia

FORM 10-KForm 10-K Annual Report to theSecurities and Exchange Commissionprovides certain additional informationand will be available in June.

A copy of this report may be obtainedwithout charge upon request to:

OFFICE OF THE CORPORATESECRETARYCircuit City Stores, Inc.9950 Mayland DriveRichmond, Virginia 23233-1464

SHAREHOLDER INQUIRIESOffice of Financial Relations(804) 527-4000, extension 2077

SECURITIES ANALYST INQUIRIESAnn M. CollierVice PresidentFinancial and Public Relations(804) 527-4058

SHAREHOLDER INFORMATION

1 2 3 4 1 2 3 4 1 2 3 41 2 3 4 1 2 3 4$0

$5

$10

$15

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$25

20011997 1998 1999 2000

CarMax

Reported Historical Information

23C I R C U I T C I T Y S T O R E S , I N C . 2 0 0 1 A N N U A L R E P O R T

Cir

cuit

Cit

y St

ores

, Inc

.

The common stock of Circuit City Stores, Inc. consists of two com-mon stock series, which are intended to reflect the performance ofthe Company's two businesses. The Circuit City Group CommonStock is intended to track the performance of the Circuit City busi-ness and related operations and the Group’s retained interest inthe CarMax Group. The effects of the retained interest in theCarMax Group on the Circuit City Group’s financial statements areidentified by the term “Inter-Group.” During the three-year perioddiscussed in this annual report, the financial results for theCompany and the Circuit City Group also have included theCompany's investment in Digital Video Express, which has beendiscontinued. The CarMax Group Common Stock is intended totrack the performance of the CarMax stores and related opera-tions. The Circuit City Group’s retained interest is not consideredoutstanding CarMax Group Common Stock. Therefore, the netearnings or losses attributed to the retained interest are notincluded in the CarMax Group’s per share calculations.

Holders of Circuit City Group Common Stock and holders ofCarMax Group Common Stock are shareholders of the Companyand as such are subject to all of the risks associated with aninvestment in the Company and all of its businesses, assets andliabilities. The results of operations or financial condition of one

Group could affect the results of operations or financial conditionof the other Group. The discussion and analysis for Circuit CityStores, Inc. presented below should be read in conjunction withthe discussion and analysis presented for each Group and inconjunction with all the Company’s SEC filings.

RESULTS OF OPERATIONSSales GrowthTotal sales for Circuit City Stores, Inc. increased 3 percent in fiscal2001 to $12.96 billion. In fiscal 2000, total sales increased 17 per-cent to $12.61 billion from $10.81 billion in fiscal 1999.

PERCENTAGE SALES CHANGE FROM PRIOR YEAR

Circuit City Circuit City CarMaxStores, Inc. Group Group

Fiscal Total Total Comparable Total Comparable

2001............. 3% (1)% (4)% 24% 17 %2000 ............ 17% 13 % 8 % 37% 2 %1999 ............ 22% 17 % 8 % 68% (2)%1998 ............ 16% 12 % (1)% 71% 6 %1997 ............ 9% 6 % (8)% 85% 23 %

(Amounts in thousands except per share data) 2001 2000 1999 1998 1997

Net sales and operating revenues ................................ $12,959,028 $12,614,390 $10,810,468 $8,870,797 $7,663,811Earnings from continuing operations ......................... $ 160,802 $ 327,830 $ 211,470 $ 124,947 $ 144,234Loss from discontinued operations.............................. $ – $ (130,240) $ (68,546) $ (20,636) $ (7,820)Net earnings.................................................................... $ 160,802 $ 197,590 $ 142,924 $ 104,311 $ 136,414Net earnings (loss) per share attributed to:

Circuit City Group:Basic:

Continuing operations................................... $ 0.73 $ 1.63 $ 1.09 $ 0.68 $ 0.74Discontinued operations............................... $ – $ (0.65) $ (0.34) $ (0.11) $ (0.04)Net earnings................................................... $ 0.73 $ 0.98 $ 0.75 $ 0.57 $ 0.70

Diluted:Continuing operations .................................. $ 0.73 $ 1.60 $ 1.08 $ 0.67 $ 0.73Discontinued operations............................... $ – $ (0.64) $ (0.34) $ (0.10) $ (0.04)Net earnings................................................... $ 0.73 $ 0.96 $ 0.74 $ 0.57 $ 0.69

CarMax Group:Basic...................................................................... $ 0.45 $ 0.01 $ (0.24) $ (0.35) $ (0.01)Diluted.................................................................. $ 0.43 $ 0.01 $ (0.24) $ (0.35) $ (0.01)

Total assets...................................................................... $ 3,871,333 $ 3,955,348 $ 3,445,266 $3,231,701 $ 3,081,173Long-term debt, excluding current installments ....... $ 116,137 $ 249,241 $ 426,585 $ 424,292 $ 430,290Deferred revenue and other liabilities......................... $ 92,165 $ 130,020 $ 112,085 $ 145,107 $ 166,295Cash dividends per share paid on

Circuit City Group Common Stock......................... $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07

See notes to consolidated financial statements.

Circuit City Stores, Inc. Management�s Discussion and Analysis of Results of Operations and Financial Condition

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THE CIRCUIT CITY GROUP. For the Circuit City Group, total salesdecreased 1 percent in fiscal 2001 to $10.46 billion. In fiscal 2000,total sales were $10.60 billion, a 13 percent increase from $9.34billion in fiscal 1999. The fiscal 2001 total sales decline includes a4 percent decline in the comparable store sales of the Circuit Citybusiness, partly offset by the net addition of 23 Circuit CitySuperstores. Throughout fiscal 2001, we experienced significantvariability in the Circuit City comparable store sales pace. Thesales pace in the major appliance category softened significantlyat the end of the first quarter and into the second quarter. In lateJuly, we announced plans to exit the appliance business andexpand our selection of key consumer electronics and home officeproducts. A product profitability analysis had indicated that theappliance category produced below-average profits. This analysis,combined with the declining sales pace and expected increases incompetition, led to the decision to exit the category. The exit fromthe appliance business and remerchandising of the appliance sell-ing space was completed by the end of the third fiscal quarter.Nevertheless, the Circuit City business continued to experience ahighly variable comparable store sales pace, and sales softenedsubstantially in the last two months of the fiscal year. We believethe variability reflects the slower consumer spending experiencedby most retailers during the second half of the year, some disrup-tion to sales caused by the partial remodeling to remerchandisethe appliance space, significant declines in average retails andindustry-wide declines in desktop personal computer sales byyear-end. Throughout the year, new technologies, better-featuredconsumer electronics and the new and expanded selections addedto the store produced strong sales growth, although not always inline with our expectations. Excluding the appliance category fromfiscal 2001 and fiscal 2000 sales, comparable store sales rose 3 per-cent in fiscal 2001.

In addition to the partial remodels, we fully remodeled 25Circuit City Superstores in central and south Florida and oneSuperstore in Richmond, Va., to a design that we believe is morecontemporary and easier to navigate. The full remodels offer betterproduct adjacencies, shopping carts and baskets, more and highlyvisible cash registers, better lighting and signs, and the expandedand new product selections now available in all stores. The 23new stores opened from August 2000 through February 2001 alsoreflect this new design, and all new stores planned for fiscal 2002will reflect this design. Consumer reaction to the design has beenpositive, but the ability to meet our longer-term expectations hasbeen difficult to determine given the overall slowdown thatoccurred during the second half of the fiscal year. In addition, thecost of remodeling and the disruption to sales in remodeled storeswere higher than anticipated. Fiscal 2002 remodels will follow aless costly design that can be completed over a shorter time period,but which we believe will offer similar benefits to the consumer.We also will focus on new marketing programs designed toincrease foot traffic at all Circuit City Superstores.

Geographic expansion is currently a limited contributor toCircuit City’s growth. We opened 23 new Circuit City Superstoresand relocated two Circuit City Superstores in fiscal 2001, increas-ing the store base 4 percent. New Superstores were added to

existing markets or built in one- or two-store markets given thatwe already operate stores in virtually all of the nation’s topmetropolitan markets.

From fiscal 1997 through fiscal 1998, a lack of significantconsumer electronics product introductions resulted in weakindustry sales. Geographic expansion was the primary contributorto growth of the Circuit City business during this time. The industrybegan to emerge from this period of declining sales in fiscal1999, and that trend continued in fiscal 2000. As noted above,sales softened again in fiscal 2001. We continue to believe thatnew technologies will generate significant industry growth duringthe current decade. However, we expect little, if any, sales growthin fiscal 2002.

In most states, Circuit City sells extended warranty programson behalf of unrelated third parties who are the primary obligors.Under these third-party warranty programs, we have no contrac-tual liability to the customer. In states where third-party warrantysales are not permitted, Circuit City sells an extended warrantyfor which we are the primary obligor. Gross dollar sales from allextended warranty programs were 5.1 percent of total sales of theCircuit City business in fiscal 2001, compared with 5.4 percent infiscal 2000 and fiscal 1999. Total extended warranty revenue,which is reported in total sales, was 4.0 percent of sales in fiscal2001, 4.4 percent of sales in fiscal 2000 and 4.6 percent of salesin fiscal 1999. The gross profit margins on products sold withextended warranties are higher than the gross profit margins onproducts sold without extended warranties. The fiscal 2001decline in extended warranty sales as a percent of total salesreflects the increased selection of products, such as entertainmentsoftware, for which extended warranties are not available andreduced consumer demand for warranties on many consumerelectronics and home office products that have experienced sig-nificant declines in average retails. Third-party extended war-ranty revenue was 3.9 percent of total sales in fiscal 2001 and 4.1percent of total sales in fiscal 2000 and fiscal 1999.

THE CARMAX GROUP. For the CarMax Group, total salesincreased 24 percent in fiscal 2001 to $2.50 billion. In fiscal 2000,total sales increased 37 percent to $2.01 billion from $1.47 billionin fiscal 1999. The fiscal 2001 total sales increase reflects a 17percent increase in the comparable store sales of the CarMax busi-ness, driven by higher-than-anticipated used-car sales, and the netaddition of two used-car superstores, two prototype satellite storesand six new-car franchises since the end of fiscal 1999. The newstores and four of the franchises moved into the comparable storesales base throughout fiscal 2001.

We believe CarMax’s fiscal 2001 sales performance primarilyreflects the improved execution of the CarMax offer at individualstores, increased awareness and use of the CarMax Web site andthe exit of CarMax’s primary used-car superstore competitor latein fiscal 2000. We believe this competitor’s exit from five multi-store markets helped eliminate consumer confusion over the twooffers. CarMax’s used-car comparable store sales growth remainedstrong through the fiscal 2001 anniversary of this competitor’sexit from the used-car superstore business. We also believe thatthe continuation of CarMax’s robust used-car sales growth during

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the second half of the fiscal year indicates that the CarMax used-car concept offers strong consumer value and can generate steadysales growth in an economic downturn.

Geographic expansion of the CarMax used-car superstoreconcept and the addition of new-car franchises were the primarycontributors to CarMax's total sales growth from fiscal 1999through the first half of fiscal 2000. Throughout this period,weak used-car sales more than offset CarMax’s strong compara-ble store sales growth in new cars. Late in fiscal 1999, CarMaxadopted a hub and satellite operating strategy in existing multi-store markets. Under the hub and satellite operating model, asatellite store delivers the same consumer offer as a hub store,but uses the reconditioning, purchasing and business officeoperations of a nearby hub store. The prototype satellites requireone-half to one-third the acreage of a standard “A” store. In fis-cal 1999, we converted five CarMax superstores in multi-storemarkets to satellite operations and opened two prototype satellitestores. During fiscal 2000, we opened two CarMax used-carsuperstores, two prototype satellite used-car superstores, fivestand-alone new-car stores and one new-car franchise that wasintegrated with a used-car superstore. CarMax also convertedone existing store into a satellite operation and relocated onefranchise next to a used-car superstore.

In the second half of fiscal 2000, CarMax limited its geo-graphic expansion to focus on building sales and profitability inexisting markets. The sales pace improved at CarMax's used-carsuperstores, including those stores with integrated new-car fran-chises, and CarMax generated comparable store sales growth forthe last two quarters and for the fiscal year. That success contin-ued in fiscal 2001 with strong comparable store sales throughoutthe year and used-car sales that exceeded expectations in allfour quarters. During the year, CarMax added two new-car fran-chises, integrating them with existing used-car superstores.

Although the performance of the used-car superstores andintegrated used- and new-car superstores exceeded expectationsin fiscal 2001, we have been disappointed by the performance ofthe stand-alone new-car stores. Operations at these stores haveimproved significantly versus their levels prior to acquisition;however, they remain below our expectations.

In most states, CarMax sells extended warranties on behalf ofunrelated third parties who are the primary obligors. Under thisthird-party warranty program, we have no contractual liabilityto the customer. In states where third-party warranty sales werenot permitted, CarMax has sold its own extended warranty forwhich we are the primary obligor. Gross dollar sales from allextended warranty programs were 4.0 percent of total sales ofthe CarMax business in fiscal 2001, 3.7 percent in fiscal 2000and 4.3 percent in fiscal 1999. The fiscal 2001 increase reflectsthe increase in used-car sales as a percentage of the overall mix,enhanced manufacturers’ programs on new cars and improvedwarranty penetration. Used cars achieve a higher warranty pene-tration rate than new cars. The fiscal 2000 decrease reflects theincrease in new-car sales as a percentage of the overall mix.Total extended warranty revenue, which is reported in totalsales, was 1.8 percent of total sales in fiscal 2001, 1.6 percent in

fiscal 2000 and 2.0 percent in fiscal 1999. Third-party extendedwarranty revenue was 1.8 percent of total sales in fiscal 2001,1.6 percent in fiscal 2000 and 1.9 percent in fiscal 1999.

IMPACT OF INFLATION. Inflation has not been a significantcontributor to the Company’s results. For the Circuit City busi-ness, average retail prices have declined in virtually all productcategories during the past three years. Although product intro-ductions could help reverse this trend in selected areas, weexpect no significant short-term change overall. Because wepurchase substantially all products sold in Circuit City stores inU.S. dollars, prices are not directly impacted by the value of thedollar in relation to foreign currencies.

For the CarMax business, profitability is based on achievingspecific gross profit dollars per vehicle rather than on averageretail prices. Because the wholesale market generally adjusts toreflect retail price trends, we believe that if the stores meetinventory turn objectives then changes in average retail priceswill have only a short-term impact on the gross margin and thusprofitability of that business.

Cost of Sales, Buying and WarehousingFor the Company, the gross profit margin was 21.6 percent ofsales in fiscal 2001, compared with 22.7 percent of sales in fiscal2000 and fiscal 1999. The fiscal 2001 gross profit margin reflectslower gross profit margins for the Circuit City business andhigher gross profit margins for the CarMax business, comparedwith fiscal 2000. Because the CarMax business produces lowergross margins than the Circuit City business, the increased salescontribution from CarMax may reduce the Company’s overallgross profit margin even though CarMax’s gross profit marginmay increase. Excluding the impact of the appliance merchan-dise markdowns and the one-time appliance exit costs incurredby the Circuit City business, the Company’s gross profit marginwas 22.0 percent of sales in fiscal 2001.

THE CIRCUIT CITY GROUP. For the Circuit City business, thegross profit margin was 23.6 percent of sales in fiscal 2001, 24.7percent of sales in fiscal 2000 and 24.4 percent of sales in fiscal1999. The fiscal 2001 gross profit margin was reduced by one-time costs of $28.3 million and merchandise markdowns of $28.0million associated with the exit from the appliance business, sig-nificantly lower appliance gross margins prior to the announcedplans to exit that business and a merchandise mix that included ahigh percentage of traditional products that carry lower grossprofit margins. The one-time appliance exit costs included leaseterminations, employee severance, fixed asset impairment andother related costs. Excluding the appliance category, the grossprofit margin was 24.7 percent of sales in fiscal 2001, comparedwith 25.4 percent of sales in fiscal 2000 and 24.7 percent of salesin fiscal 1999. Excluding the impact of the appliance merchan-dise markdowns and the one-time appliance exit costs, the grossprofit margin was 24.1 percent of sales in fiscal 2001.

The improvement in the gross profit margin from fiscal 1999to fiscal 2000 primarily reflected the higher percentage of salesfrom better-featured products and newer technologies, whichcarry higher gross profit margins, and continued improvementsin inventory management partly offset by the strength in

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personal computer sales, which carry lower gross margins. Infiscal 2001, the decline in the gross profit margin was limited bylower personal computer sales and by continued double-digitsales growth in new technologies and in higher margin cate-gories where selection was expanded as part of the exit from theappliance business. The impact of the appliance category and thehigh proportion of sales represented by traditional products morethan offset these factors.

THE CARMAX GROUP. For the CarMax business, the gross profitmargin was 13.2 percent in fiscal 2001, 11.9 percent in fiscal 2000and 11.7 percent in fiscal 1999. At the end of fiscal 1998, CarMaxinstituted a profit improvement plan that included better inven-tory management, increased retail service sales, pricing adjust-ments and the addition of consumer electronics accessory sales.CarMax’s gross profit margins have improved significantly sincethat time. In fiscal 2001, the increase in used-car sales as a percentof the total sales mix and continued strong inventory managementthroughout the year, especially during the second half when themodel-year transition occurs in the new-car segment, contributedto a higher gross margin. Significant increases in unit sales of newcars as a percentage of total unit sales limited the gross marginimprovement in fiscal 2000.

Selling, General and Administrative ExpensesFor the Company, selling, general and administrative expenses were19.4 percent of sales in fiscal 2001, compared with 18.3 percent ofsales in fiscal 2000 and 19.3 percent of sales in fiscal 1999. Profitsgenerated by the Company’s finance operations are recorded as areduction to selling, general and administrative expenses.

THE CIRCUIT CITY GROUP. For the Circuit City business, selling,general and administrative expenses were 21.7 percent of sales infiscal 2001, compared with 19.6 percent of sales in fiscal 2000and 20.1 percent of sales in fiscal 1999. The fiscal 2001 increasereflects the decline in comparable store sales, $41.9 million inremodeling costs for the Florida stores, $30.0 million in costsrelated to the partial remodels and $5.0 million in severance costsassociated with the fourth quarter workforce reduction. Excludingthese costs and the estimated sales disruption during the seven to10 days of partial remodeling that occurred primarily in the thirdquarter, the fiscal 2001 expense ratio would have been 20.9 per-cent of sales. The improvement in the expense ratio from fiscal1999 to fiscal 2000 primarily reflects leverage gained from thefiscal 2000 comparable store sales increase.

THE CARMAX GROUP. For the CarMax business, selling, generaland administrative expenses were 9.8 percent of sales in fiscal2001, 11.3 percent of sales in fiscal 2000 and 13.9 percent ofsales in fiscal 1999. The fiscal 2001 selling, general and adminis-trative expense ratio continued the improvement experienced infiscal 2000 and reflects the leverage achieved from strong total

and comparable store sales growth; more efficient advertisingexpenditures; overall improvements in store productivity, includingthose achieved through the hub and satellite operating strategywe adopted in multi-store markets; and a favorable contributionfrom the finance operation. The fiscal 2001 improvements werepartly offset by an $8.7 million write-off of goodwill associatedwith two underperforming stand-alone new-car franchises.Excluding these costs, the fiscal 2001 expense ratio would havebeen 9.4 percent of sales. The fiscal 2000 improvements werepartly offset by $4.8 million in charges related to lease terminationcosts on undeveloped property and a write-down of assetsassociated with excess property for sale. Excluding these costs,the fiscal 2000 expense ratio would have been 11.1 percent ofsales. The higher ratio in fiscal 1999 reflects the costs associatedwith the expansion of CarMax superstores and the below-plansales in a number of multi-store metropolitan markets.

Interest ExpenseInterest expense has remained unchanged as a percent of salesacross the three-year period at 0.2 percent of sales.

Earnings from Continuing OperationsEarnings from continuing operations for Circuit City Stores, Inc.were $160.8 million in fiscal 2001, compared with $327.8 mil-lion in fiscal 2000 and $211.5 million in fiscal 1999. The fiscal2001 decrease reflects the lower earnings for the Circuit Citybusiness, partly offset by the earnings increase achieved by theCarMax business. The fiscal 2000 increase reflects earningsgrowth of 39 percent for the Circuit City business and a slightprofit for the CarMax business.

THE CIRCUIT CITY GROUP. For the Circuit City business, earn-ings from continuing operations before the Inter-Group Interestin the CarMax Group were $115.2 million, or 56 cents per share,in fiscal 2001, compared with $326.7 million, or $1.60 per share,in fiscal 2000 and $235.0 million, or $1.17 per share, in fiscal1999. Excluding the estimated sales disruption during the sevento 10 days of partial remodeling, the appliance merchandisemarkdowns, exit costs, remodel expenses and severance costsrelated to the workforce reduction, earnings from continuingoperations before the Inter-Group Interest in the CarMax Groupwould have been $205.1 million, or $1.00 per share, in fiscal 2001.

The net earnings attributed to the Circuit City Group’s Inter-Group Interest in the CarMax Group were $34.0 million in fiscal2001, compared with net earnings of $862,000 in fiscal 2000and a net loss of $18.1 million in fiscal 1999.

Earnings from continuing operations attributed to the CircuitCity Group were $149.2 million, or 73 cents per share, in fiscal2001; $327.6 million, or $1.60 per share, in fiscal 2000; and$216.9 million, or $1.08 per share, in fiscal 1999.

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Circuit City GroupEarnings per Share fromContinuing Operations

Fiscal 2001 2000 1999

Circuit City store business ........................ $ 1.00 $1.60 $ 1.17Impact of merchandise markdowns*........ (0.08) – –Impact of appliance exit ........................... (0.09) – –Impact of Florida remodels**..................... (0.13) – –Impact of partial remodels**....................... (0.09) – –Impact of sales disruption ........................ (0.03) – –Impact of workforce reduction**............... (0.02) – –Inter-Group Interest in CarMax............... 0.17 – (0.09)

Circuit City Group...................................... $ 0.73 $1.60 $ 1.08

** Reflected as a reduction in gross profit margins.** Reflected as an increase in selling, general and administrative expenses.

THE CARMAX GROUP. For the CarMax business, net earningswere $45.6 million in fiscal 2001, compared with net earnings of$1.1 million in fiscal 2000 and a net loss of $23.5 million in fiscal1999. Excluding the write-off of goodwill, net earnings wouldhave been $51.0 million in fiscal 2001. Excluding lease terminationcosts and the write-down of assets, net earnings would have been$4.1 million in fiscal 2000.

Net earnings attributed to the CarMax Group Common Stockwere $11.6 million, or 43 cents per share, in fiscal 2001, comparedwith $256,000, or 1 cent per share, in fiscal 2000, and a net lossof $5.5 million, or 24 cents per share, in fiscal 1999.

Loss from Discontinued OperationsOn June 16, 1999, Digital Video Express announced that it wouldcease marketing of the Divx home video system and discontinueoperations, but existing, registered customers would be able toview discs during a two-year phase-out period. The operatingresults of Divx and the loss on disposal of the Divx business havebeen segregated from continuing operations and reported as sepa-rate line items, after tax, on the Company's statements of earningsfor the periods presented.

The loss from the discontinued operations of Divx totaled$16.2 million after an income tax benefit of $9.9 million in fiscal2000 and $68.5 million after an income tax benefit of $42.0 mil-lion in fiscal 1999.

In fiscal 2000, the loss on the disposal of the Divx businesstotaled $114.0 million after an income tax benefit of $69.9 mil-lion. The loss on the disposal includes a provision for operatinglosses to be incurred during the phase-out period. It alsoincludes provisions for commitments under licensing agreementswith motion picture distributors, the write-down of assets to netrealizable value, lease termination costs, employee severance andbenefit costs and other contractual commitments.

Net Earnings Net earnings for the Company were $160.8 million in fiscal 2001,$197.6 million in fiscal 2000 and $142.9 million in fiscal 1999.

Operations OutlookTHE CIRCUIT CITY GROUP. For the Circuit City business, we

believe that increased household penetration of products andservices such as broadband Internet access, wireless communica-tions, multi-channel video programming devices, digital televi-sion and digital imaging will drive profitability of the consumerelectronics business during the current decade. For that reason,we are focused on store designs, sales counselor training, inven-tory management, marketing programs and Six Sigma processimprovements that will maintain Circuit City’s position as aleading retailer of new technologies.

Despite these plans and longer-term outlook, we recognizethat the sales pace shifted significantly throughout fiscal 2001and that sales were especially weak at the end of the fiscal year.Therefore, we are cautious in our outlook for fiscal 2002. Weexpect to open 15 to 20 new Circuit City Superstores, relocateapproximately 10 Superstores and fully remodel 20 to 25Superstores. We expect limited sales and earnings growth for theCircuit City business in fiscal 2002. We do, however, expect con-tinued strong sales and earnings growth for the CarMax businessand anticipate that CarMax will make a greater contribution tothe earnings attributed to the Circuit City Group in fiscal 2002.

THE CARMAX GROUP. We believe that the higher-than-expectedsales and earnings growth produced by CarMax in fiscal 2001indicates that the CarMax business has developed a store conceptthat can generate sustained profits. We believe that we have inplace the infrastructure that will enable CarMax to maintain itsimproved level of execution, generate additional comparablestore sales growth and resume geographic expansion.

In single-store markets, our most mature CarMax stores havecaptured market shares of 8 percent to 10 percent. We have iden-tified approximately 35 additional markets that could support an“A” store, the standard CarMax store size going forward. Weexpect to enter two of these markets, Sacramento, Calif., andGreensboro, N.C., in late fiscal 2002. We also believe that we canadd another 10 satellite CarMax superstores in our existingmulti-store markets. Assuming the CarMax used-car businesscontinues to meet our expectations, we plan to open, in fiscal2003, four to six stores, including openings in single-store mar-kets and satellite stores in existing multi-store markets, and, infiscal 2004 through fiscal 2006, six to eight stores per year, againfocusing near-term growth on single-store markets or satellites.

Based on the performance of the existing used-car superstores,we believe that a standard “A” store in a single-store market willat maturity produce sales in the $50 million to $100 millionrange and a pretax, before non-store overhead, store operatingprofit margin in the range of 5.0 percent to 9.5 percent. Webelieve a satellite store at maturity will produce sales in the $36million to $72 million range and a pretax, before non-store over-head, store operating profit margin in the range of 5.0 percent to9.3 percent. In both cases, maturity is assumed to be the fifthyear of operation. If we meet our store opening and sales per

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store objectives, we believe that CarMax can produce annualsales volumes of $5 billion within five years. Non-store overhead,which includes all field operating expenses outside the store aswell as corporate overhead, was 2.3 percent of sales in fiscal2001, and we estimate it will decline to approximately 1.7 percentof sales when annual volumes reach $5 billion.

Given the strong fiscal 2001 performance, we are highly opti-mistic about our growth plan for CarMax. Nevertheless, we willproceed cautiously as we seek to ensure that all sales growth isprofitable sales growth and that we are delivering an attractivereturn on investment.

RECENT ACCOUNTING PRONOUNCEMENTSIn June 1998, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities.” SFAS No.133, as amended by SFAS No. 137 and No. 138, is effective forquarters in fiscal years beginning after June 15, 2000. SFAS No.133, as amended, standardizes the accounting for derivativeinstruments and requires that an entity recognize those items aseither assets or liabilities and measure them at fair value.

In September 2000, the FASB issued SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguish-ments of Liabilities—a replacement of FASB Statement No. 125.”While SFAS No. 140 carries over most of the provisions of SFASNo. 125, it provides new standards for reporting financial assetstransferred as collateral and new standards for the derecognition offinancial assets, in particular transactions involving the use of spe-cial purpose entities. SFAS No. 140 also prescribes additional dis-closures for securitization transactions accounted for as sales. SFASNo. 140 is effective for transfers and servicing of financial assetsand extinguishments of liabilities occurring after March 31, 2001,except for certain disclosures that are required for fiscal years end-ing after December 15, 2000. The Company does not expect theadoption of SFAS No. 133 or SFAS No. 140 to have a materialimpact on its financial position, results of operations or cash flows.

In July 2000, the FASB issued Emerging Issues Task ForceNo. 00-14, “Accounting for Certain Sales Incentives,” which iseffective for the fiscal quarter beginning after March 15, 2001.The issue provides guidance for sales incentives offered to cus-tomers to be classified as a reduction of revenue. The Companyoffers certain mail-in rebates that the Company currently recordsin cost of sales, buying and warehousing. The Company does notexpect the adoption of EITF No. 00-14 to have a material impacton its financial position, results of operations or cash flows.However, the Company expects to reclassify certain rebateexpenses from cost of sales, buying and warehousing to net salesand operating income to be in compliance with EITF No. 00-14.For fiscal 2001, this reclassification would have increased ourgross profit margin and our expense ratio by 20 basis points.

FINANCIAL CONDITIONLiquidity and Capital ResourcesIn fiscal 2001, net cash provided by operating activities of con-tinuing operations was $155.8 million, compared with $626.2million in fiscal 2000 and $319.0 million in fiscal 1999. The fis-cal 2001 decrease reflects the lower earnings from continuingoperations for the Circuit City business and a decrease inaccounts payable, partly offset by the increase in earnings forthe CarMax business. The fiscal 2000 increase primarily reflectsincreased earnings from the Circuit City and CarMax businessesand increases in accounts payable for both businesses, partlyoffset by increases in inventory.

During fiscal 2001, a term loan totaling $175 million wasrepaid using existing working capital. In addition, a term loantotaling $130 million and due in June 2001 was classified as a cur-rent liability. Although the Company has the ability to refinancethis debt, we intend to repay it using existing working capital.

Capital expenditures have been funded primarily throughsale-leaseback transactions, landlord reimbursements and short-and long-term debt. Capital expenditures of $285.6 million infiscal 2001 primarily were related to Circuit City Superstoreremodeling and new Circuit City Superstore construction. Capitalexpenditures of $222.3 million in fiscal 2000 and $352.4 millionin fiscal 1999 largely were incurred in connection with theexpansion programs for both businesses. Sale-leasebacks, land-lord reimbursement transactions and fixed asset sales totaled$115.7 million in fiscal 2001, $100.2 million in fiscal 2000 and$273.6 million in fiscal 1999.

During fiscal 2001, CarMax acquired one new-car franchisefor a total of $1.3 million. In fiscal 2000, CarMax acquired fivenew-car franchises for a total of $34.8 million. These acquisi-tions were financed through cash resources. Costs in excess ofthe acquired net tangible assets, which were primarily inventory,were recorded as goodwill and covenants not to compete.

Receivables generated by the Company's finance operationsare funded through securitization transactions that allow theoperations to sell their receivables while retaining a small inter-est in them. The Circuit City finance operation has a master trustsecuritization facility for its private-label credit card that allowsthe transfer of up to $1.31 billion in receivables through bothprivate placement and the public market. A second master trustsecuritization program allows for the transfer of up to $1.94 bil-lion in receivables related to the operation’s bankcard programs.Securitized receivables under all Circuit City programs totaled$2.75 billion at February 28, 2001.

The Company also has an asset securitization program oper-ated through a special purpose subsidiary on behalf of CarMax.At the end of fiscal 2001, that program allowed the transfer ofup to $450 million in automobile loan receivables. In October1999, the Company formed an owner trust securitization facilitythat allowed for a $644 million securitization of automobile loanreceivables in the public market. At February 28, 2001, the program had a capacity of $329 million. In January 2001, theCompany formed an additional owner trust securitization facilitythat allowed for a $655 million securitization of automobile loan

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receivables in the public market. The program had a capacity of$655 million at the end of fiscal 2001. Securitized receivablesunder all CarMax programs totaled $1.28 billion at the end offiscal 2001.

The receivables are sold to unaffiliated third parties with the servicing rights retained. We expect that securitization programs can be expanded to accommodate future growth forboth businesses.

Capital StructureTotal assets at February 28, 2001, were $3.87 billion, down $84.0million, or 2 percent, since February 29, 2000. A $197.8 milliondecrease in cash offset by a $68.5 million increase in inventoryprimarily contributed to the decrease in total assets.

Over the past three years, expansion for the Circuit City andCarMax businesses has been funded with internally generatedcash, sale-leaseback transactions, operating leases and short-term and long-term debt. Finance operation receivables havebeen funded through securitization transactions.

During fiscal 2001, stockholders’ equity increased 10 percentto $2.36 billion. Capitalization for the past five years is illus-trated in the “Capitalization” table below. Net earnings for theCircuit City Group and the CarMax Group produced a return onequity of 7.1 percent in fiscal 2001, compared with 9.8 percentin fiscal 2000.

We anticipate that in fiscal 2002 capital expenditures ofapproximately $295 million will be funded through a combina-tion of internally generated cash, sale-leaseback transactions,operating leases or floor plan financing of inventory and thatsecuritization transactions will finance the growth in receiv-ables. At the end of fiscal 2001, we maintained a multi-year,$150 million unsecured revolving credit agreement and $360million in committed seasonal lines that are renewed annuallywith various banks.

The Groups rely on the external debt of Circuit City Stores,Inc. to provide working capital needed to fund net assets nototherwise financed through sale-leasebacks or the securitizationof receivables. All significant financial activities of each Groupare managed by the Company on a centralized basis and aredependent on the financial condition of the Company. These

financial activities include the investment of surplus cash,issuance and repayment of debt, securitization of receivables,sale-leasebacks of real estate and Inter-Group loans.

MARKET RISKThe Company manages the private-label and bankcard revolvingloan portfolios of the Circuit City finance operation and theautomobile installment loan portfolio of the CarMax financeoperation. Portions of these portfolios are securitized and, there-fore, are not presented on the Company’s balance sheets. Interestrate exposure relating to these receivables represents a marketrisk exposure that the Company has managed with matchedfunding and interest rate swaps.

Revolving Loans Interest rates charged on the accounts in the managed private-label and bankcard portfolios are primarily indexed to theprime rate, adjustable on a monthly basis, with the balance at afixed annual percentage rate. Total principal outstanding atFebruary 28, 2001, and February 29, 2000, had the followingAPR structure:

(Amounts in millions) 2001 2000

Indexed to prime rate .......................................... $2,596 $2,631Fixed APR.............................................................. 203 213

Total........................................................................ $2,799 $2,844

Financing for the securitization programs is achieved primar-ily through the issuance of public market debt, which is issued atfloating rates based on LIBOR. Receivables held by the Companyfor sale are financed with working capital. At February 28, 2001,and February 29, 2000, financings were as follows:

(Amounts in millions) 2001 2000

Floating-rate (including synthetic alteration) securitizations.............................. $2,754 $2,689

Fixed-rate securitizations.................................... — 137Held by the Company for sale ........................... 45 18

Total........................................................................ $2,799 $2,844

CAPITALIZATIONFiscal 2001 2000 1999 1998 1997

(Dollar amounts in millions) $ % $ % $ % $ % $ %

Long-term debt, excludingcurrent installments................................... 116.1 5 249.2 10 426.6 17 424.3 18 430.3 19

Other long-term liabilities .............................. 107.1 4 157.8 6 149.7 6 171.5 7 199.4 9Total stockholders’ equity............................... 2,356.5 91 2,142.2 84 1,905.1 77 1,730.0 75 1,614.8 72

Total capitalization .......................................... 2,579.7 100 2,549.2 100 2,481.4 100 2,325.8 100 2,244.5 100

Automobile Installment LoansTotal principal outstanding for fixed-rate automobile loans atFebruary 28, 2001, and February 29, 2000, was as follows:

(Amounts in millions) 2001 2000

Fixed APR.............................................................. $1,296 $932

Financing for these receivables is achieved through assetsecuritization programs that, in turn, issue fixed- and floating-rate securities. Interest rate exposure is hedged through the useof interest rate swaps matched to projected payoffs. Receivablesheld by the Company for investment or sale are financed withworking capital. Financings at February 28, 2001, and February29, 2000, were as follows:

(Amounts in millions) 2001 2000

Fixed-rate securitization ..................................... $ 984 $559Floating-rate securitizations

synthetically altered to fixed........................ 299 327Floating-rate securitizations............................... 1 1Held by the Company:

For investment*................................................ 9 22For sale............................................................. 3 23

Total........................................................................ $1,296 $932

* Held by a bankruptcy remote special purpose company.

The Company has analyzed its interest rate exposure and hasconcluded that it did not represent a material market risk atFebruary 28, 2001, and February 29, 2000. Because programs arein place to manage interest rate exposure relating to the con-sumer loan portfolios, we expect to experience relatively littleimpact as interest rates fluctuate. The Company also has theability to adjust fixed-APR revolving cards and the index onfloating-rate cards, subject to cardholder ratification, but doesnot currently anticipate the need to do so.

FORWARD-LOOKING STATEMENTSThe provisions of the Private Securities Litigation Reform Act of1995, which became law in December 1995, provide companieswith a “safe harbor” when making forward-looking statements.This “safe harbor” encourages companies to provide prospectiveinformation about their companies without fear of litigation. TheCompany wishes to take advantage of the “safe harbor” provi-sions of the Act. Company statements that are not historicalfacts, including statements about management’s expectations forfiscal 2002 and beyond, are forward-looking statements andinvolve various risks and uncertainties. Factors that could causethe Company’s actual results to differ materially from manage-ment’s projections, forecasts, estimates and expectations include,but are not limited to, the following:

(a) changes in the amount and degree of promotional inten-sity exerted by current competitors and potential new competi-

tion from both retail stores and alternative methods or channelsof distribution such as online and telephone shopping servicesand mail order;

(b) changes in general U.S. or regional U.S. economic condi-tions including, but not limited to, consumer credit availability,consumer credit delinquency and default rates, interest rates,inflation, personal discretionary spending levels and consumersentiment about the economy in general;

(c) the presence or absence of, or consumer acceptance of,new products or product features in the merchandise categoriesthe Company sells and changes in the Company’s actual mer-chandise sales mix;

(d) significant changes in retail prices for products sold byany of the Company’s businesses, including changes in prices fornew and used cars and the relative consumer demand for new orused cars;

(e) lack of availability or access to sources of supply forappropriate Circuit City or CarMax inventory;

(f) inability on the part of either of the Company’s businessesto liquidate excess inventory should excess inventory develop;

(g) unanticipated adverse results from the remodeling ofCircuit City Superstores;

(h) the ability to attract and retain an effective managementteam in a dynamic environment or changes in the cost or avail-ability of a suitable work force to manage and support theCompany’s service-driven operating strategies;

(i) changes in availability or cost of capital expenditure andworking capital financing, including the availability of long-term financing to support development of the Company’s busi-nesses and the availability of securitization financing for creditcard and automobile installment loan receivables;

(j) changes in production or distribution costs or cost ofmaterials for the Company’s advertising;

(k) availability of appropriate real estate locations for expansion;(l) the imposition of new restrictions or regulations regarding

the sale of products and/or services the Company sells, changesin tax rules and regulations applicable to the Company or itscompetitors, the imposition of new environmental restrictions,regulations or laws or the discovery of environmental conditionsat current or future locations or any failure to comply with suchlaws or any adverse change in such laws;

(m) adverse results in significant litigation matters;(n) changes in levels of competition in the car business from

either traditional competitors and/or new nontraditional com-petitors utilizing auto superstore or other formats; and,

(o) the inability of the CarMax business to reach expectedmature sales and earnings potential.

The United States retail industry and the specialty retailindustry in particular are dynamic by nature and have undergonesignificant changes over the past several years. The Company’sability to anticipate and successfully respond to continuing chal-lenges is key to achieving its expectations.

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Circuit City Group* CarMax Group

Market Price of Common Stock Dividends Market Price of Common Stock

Fiscal 2001 2000 2001 2000 2001 2000

Quarter HIGH LOW HIGH LOW HIGH LOW HIGH LOW

1st .............................................. $65.19 $37.25 $39.19 $25.94 $.0175 $.0175 $4.25 $1.56 $5.50 $3.692nd............................................. $56.63 $21.00 $52.97 $35.44 $.0175 $.0175 $4.88 $2.63 $7.13 $3.383rd.............................................. $28.25 $11.56 $53.88 $35.00 $.0175 $.0175 $5.38 $3.38 $4.00 $1.754th.............................................. $19.90 $ 8.69 $51.69 $32.50 $.0175 $.0175 $5.50 $3.69 $3.25 $1.31

Total $.0700 $.0700

* Circuit City Group stock prices and dividends per share have been adjusted to reflect a two-for-one stock split effective June 30, 1999.

The common stock of Circuit City Stores, Inc. includes two series: Circuit City Stores, Inc.—Circuit City Group Common Stock andCircuit City Stores, Inc.—CarMax Group Common Stock. Both Group stocks are traded on the New York Stock Exchange. The quarterlydividend data shown below applies to the Circuit City Group Common Stock for the applicable periods. No dividend data is shown forthe CarMax Group Common Stock since it pays no dividends at this time.

COMMON STOCK

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Consolidated Statements of Earnings

Years Ended February 28 or 29(Amounts in thousands except per share data) 2001 % 2000 % 1999 %

NET SALES AND OPERATING REVENUES........................................... $12,959,028 100.0 $12,614,390 100.0 $10,810,468 100.0Cost of sales, buying and warehousing ..................................... 10,135,380 78.2 9,751,833 77.3 8,354,230 77.3Appliance exit costs [NOTE 15] ........................................................ 28,326 0.2 — — — —

GROSS PROFIT................................................................................. 2,795,322 21.6 2,862,557 22.7 2,456,238 22.7

Selling, general and administrative expenses [NOTE 11] ................ 2,514,912 19.4 2,309,593 18.3 2,086,838 19.3Appliance exit costs [NOTE 15] ........................................................ 1,670 — — — — —Interest expense [NOTE 5]................................................................. 19,383 0.2 24,206 0.2 28,319 0.2

TOTAL EXPENSES.............................................................................. 2,535,965 19.6 2,333,799 18.5 2,115,157 19.5

Earnings from continuing operations before income taxes ....... 259,357 2.0 528,758 4.2 341,081 3.2Provision for income taxes [NOTE 6] .............................................. 98,555 0.8 200,928 1.6 129,611 1.2

EARNINGS FROM CONTINUING OPERATIONS................................. 160,802 1.2 327,830 2.6 211,470 2.0

Discontinued operations [NOTE 16]:Loss from discontinued operations of Divx,

less income tax benefit ..................................................... – — (16,215) (0.1) (68,546) (0.7)Loss on disposal of Divx, less income tax benefit................ – — (114,025) (0.9) — —

Loss from discontinued operations ............................................ – — (130,240) (1.0) (68,546) (0.7)

NET EARNINGS................................................................................. $ 160,802 1.2 $ 197,590 1.6 $ 142,924 1.3

Net earnings (loss) attributed to [NOTES 1 AND 2]:Circuit City Group Common Stock:

Continuing operations ...................................................... $ 149,247 $ 327,574 $ 216,927Discontinued operations ................................................... – (130,240) (68,546)

CarMax Group Common Stock ............................................. 11,555 256 (5,457)

$ 160,802 $ 197,590 $ 142,924

Weighted average common shares [NOTES 2 AND 8]:Circuit City Group basic......................................................... 203,774 201,345 198,304

Circuit City Group diluted...................................................... 205,830 204,321 200,812

CarMax Group basic ............................................................... 25,554 23,778 22,604

CarMax Group diluted............................................................ 26,980 25,788 22,604

NET EARNINGS (LOSS) PER SHARE ATTRIBUTED TO [NOTES 2 AND 8]:Circuit City Group basic:

Continuing operations............................................................ $ 0.73 $ 1.63 $ 1.09Discontinued operations......................................................... – (0.65) (0.34)

Net earnings............................................................................. $ 0.73 $ 0.98 $ 0.75

Circuit City Group diluted:Continuing operations............................................................ $ 0.73 $ 1.60 $ 1.08Discontinued operations ........................................................ – (0.64) (0.34)

Net earnings............................................................................. $ 0.73 $ 0.96 $ 0.74

CarMax Group basic..................................................................... $ 0.45 $ 0.01 $ (0.24)

CarMax Group diluted ................................................................. $ 0.43 $ 0.01 $ (0.24)

See accompanying notes to consolidated financial statements.

Consolidated Balance Sheets

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At February 28 or 29(Amounts in thousands except share data) 2001 2000

ASSETS

CURRENT ASSETS:

Cash and cash equivalents.................................................................................................................... $ 446,131 $ 643,933Net accounts receivable [NOTE 12] ........................................................................................................... 585,761 593,276Inventory ................................................................................................................................................ 1,757,664 1,689,209Prepaid expenses and other current assets......................................................................................... 57,623 16,197

TOTAL CURRENT ASSETS........................................................................................................................... 2,847,179 2,942,615Property and equipment, net [NOTES 4 AND 5] .......................................................................................... 988,947 965,181Other assets............................................................................................................................................. 35,207 47,552

TOTAL ASSETS........................................................................................................................................... $3,871,333 $3,955,348

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current installments of long-term debt [NOTES 5 AND 10] ....................................................................... $ 132,388 $ 177,344Accounts payable................................................................................................................................... 902,560 960,131Short-term debt [NOTE 5] .......................................................................................................................... 1,200 3,005Accrued expenses and other current liabilities.................................................................................. 162,972 204,561Deferred income taxes [NOTE 6] ............................................................................................................... 92,479 61,118

TOTAL CURRENT LIABILITIES..................................................................................................................... 1,291,599 1,406,159Long-term debt, excluding current installments [NOTES 5 AND 10] ........................................................ 116,137 249,241Deferred revenue and other liabilities................................................................................................. 92,165 130,020Deferred income taxes [NOTE 6] ............................................................................................................... 14,949 27,754

TOTAL LIABILITIES..................................................................................................................................... 1,514,850 1,813,174

STOCKHOLDERS’ EQUITY [NOTES 1 AND 7]:

Circuit City Group Common Stock, $0.50 par value; 350,000,000 shares authorized;207,020,000 shares issued and outstanding (203,868,000 in 2000).......................................... 103,510 101,934

CarMax Group Common Stock, $0.50 par value; 175,000,000 shares authorized;25,639,000 shares issued and outstanding (25,614,000 in 2000) .............................................. 12,820 12,807

Capital in excess of par value .............................................................................................................. 642,838 576,574Retained earnings .................................................................................................................................. 1,597,315 1,450,859

TOTAL STOCKHOLDERS’ EQUITY.............................................................................................................. 2,356,483 2,142,174

Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13, 14, 15 and 16]

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY.................................................................................... $3,871,333 $3,955,348

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

OPERATING ACTIVITIES:

Net earnings.......................................................................................................... $ 160,802 $ 197,590 $ 142,924Adjustments to reconcile net earnings to net cash provided

by operating activities of continuing operations:Loss from discontinued operations [NOTE 16].................................................. – 16,215 68,546Loss on disposal of discontinued operations [NOTE 16].................................. – 114,025 —Depreciation and amortization ..................................................................... 153,090 148,164 129,727Loss on disposition of property and equipment ......................................... 4,674 17 3,087Provision for deferred income taxes ............................................................ 19,765 43,053 17,235Changes in operating assets and liabilities, net of effects

from business acquisitions:Decrease in deferred revenue and other liabilities ............................... (17,855) (15,565) (33,022)Decrease (increase) in net accounts receivable ..................................... 7,541 (18,922) 23,640Increase in inventory................................................................................ (67,655) (184,507) (97,597)(Increase) decrease in prepaid expenses and other current assets......... (41,426) 81,316 31,257Decrease (increase) in other assets.......................................................... 1,012 240 (607)(Decrease) increase in accounts payable, accrued expenses and

other current liabilities ....................................................................... (64,193) 244,559 33,838

NET CASH PROVIDED BY OPERATING ACTIVITIES

OF CONTINUING OPERATIONS ............................................................................ 155,755 626,185 319,028

INVESTING ACTIVITIES:

Cash used in business acquisitions [NOTE 3]......................................................... (1,325) (34,849) (41,562)Purchases of property and equipment............................................................... (285,556) (222,268) (352,384)Proceeds from sales of property and equipment.............................................. 115,695 100,151 273,647

NET CASH USED IN INVESTING ACTIVITIES

OF CONTINUING OPERATIONS ......................................................................... (171,186) (156,966) (120,299)

FINANCING ACTIVITIES:

Payments on short-term debt, net ..................................................................... (1,805) (5,011) (960)Principal payments on long-term debt [NOTE 5].................................................. (178,060) (2,707) (1,301)Issuances of Circuit City Group Common Stock, net ...................................... 38,123 18,591 34,301Issuances of CarMax Group Common Stock, net ............................................ (109) 2,361 2,324Dividends paid on Circuit City Group Common Stock ................................... (14,346) (14,207) (13,981)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

OF CONTINUING OPERATIONS ......................................................................... (156,197) (973) 20,383

CASH USED IN DISCONTINUED OPERATIONS [NOTE 16]................................................ (26,174) (90,193) (69,844)

(Decrease) increase in cash and cash equivalents ................................................. (197,802) 378,053 149,268Cash and cash equivalents at beginning of year................................................... 643,933 265,880 116,612

Cash and cash equivalents at end of year.............................................................. $ 446,131 $ 643,933 $ 265,880

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for:Interest................................................................................................................... $ 25,336 $ 34,389 $ 31,858Income taxes......................................................................................................... $ 117,366 $ 14,908 $ 53,528

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Stockholders� Equity

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Common Shares Outstanding Common StockCapital In

Circuit City CarMax Circuit City CarMax Excess of Retained(Amounts in thousands except per share data) Group Group Group Group Par Value Earnings Total

BALANCE AT MARCH 1, 1998............................................... 99,282 22,204 $ 49,641 $ 11,102 $530,763 $1,138,533 $1,730,039Net earnings................................................................. — — — — — 142,924 142,924Exercise of common stock options [NOTE 7]................ 1,004 543 502 272 16,945 — 17,719Shares issued under Employee

Stock Purchase Plans [NOTE 7]................................. 429 269 215 134 19,431 — 19,780Shares issued under the 1994 Stock

Incentive Plan [NOTE 7]............................................. 360 100 180 50 14,588 — 14,818Tax benefit from stock issued.................................... — — — — 9,523 — 9,523Other.............................................................................. 32 — 16 — 1,445 — 1,461Shares cancelled upon reacquisition

by Company............................................................ (287) — (144) — (14,239) — (14,383)Unearned compensation-restricted stock................. — — — — (2,770) — (2,770)Cash dividends-Circuit City Group Common

Stock ($0.14 per share).......................................... — — — — — (13,981) (13,981)

BALANCE AT FEBRUARY 28, 1999......................................... 100,820 23,116 50,410 11,558 575,686 1,267,476 1,905,130Effect of two-for-one stock split [NOTE 1] ................... 100,820 — 50,410 — (50,410) — —Net earnings................................................................. — — — — — 197,590 197,590Exercise of common stock options [NOTE 7]................ 2,864 2,027 1,432 1,014 34,232 — 36,678Shares issued under Employee

Stock Purchase Plans [NOTE 7]................................. 502 506 251 253 21,547 — 22,051Shares issued under the 1994 Stock

Incentive Plan [NOTE 7]............................................. 346 30 173 15 13,996 — 14,184Tax benefit from stock issued .................................... — — — — 32,459 — 32,459Shares cancelled upon reacquisition

by Company............................................................ (1,484) (65) (742) (33) (52,173) — (52,948)Unearned compensation-restricted stock................. — — — — 1,237 — 1,237Cash dividends-Circuit City Group Common

Stock ($0.07 per share).......................................... — — — — — (14,207) (14,207)

BALANCE AT FEBRUARY 29, 2000......................................... 203,868 25,614 101,934 12,807 576,574 1,450,859 2,142,174Net earnings................................................................. — — — — — 160,802 160,802Exercise of common stock options [NOTE 7]................ 1,526 56 763 28 35,391 — 36,182Shares issued under Employee

Stock Purchase Plans [NOTE 7]................................. 862 — 431 — 16,119 — 16,550Shares issued under the 1994 Stock

Incentive Plan [NOTE 7]............................................. 1,486 — 743 — 31,912 — 32,655Tax benefit from stock issued .................................... — — — — 29,839 — 29,839Shares cancelled upon reacquisition

by Company............................................................ (722) (31) (361) (15) (32,774) — (33,150)Unearned compensation-restricted stock................. — — — — (14,223) — (14,223)Cash dividends-Circuit City Group Common

Stock ($0.07 per share).......................................... — — — — — (14,346) (14,346)

BALANCE AT FEBRUARY 28, 2001......................................... 207,020 25,639 $103,510 $12,820 $642,838 $1,597,315 $2,356,483

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

1. BASIS OF PRESENTATIONThe common stock of Circuit City Stores, Inc. consists of twocommon stock series, which are intended to reflect the perfor-mance of the Company's two businesses. The Circuit City GroupCommon Stock is intended to track the performance of the CircuitCity store-related operations, the Group’s retained interest in theCarMax Group and the Company’s investment in Digital VideoExpress, which has been discontinued (see Note 16). The CarMaxGroup Common Stock is intended to track the performance of theCarMax Group's operations. The Circuit City Group held a 74.6percent interest in the CarMax Group at February 28, 2001, a74.7 percent interest at February 29, 2000, and a 76.6 percentinterest at February 28, 1999. The terms of each series of com-mon stock are discussed in detail in the Company's Form 8-Aregistration statement on file with the SEC.

Notwithstanding the attribution of the Company’s assets andliabilities, including contingent liabilities, and stockholders’equity between the Circuit City Group and the CarMax Groupfor the purposes of preparing the financial statements, holdersof Circuit City Group Common Stock and holders of CarMaxGroup Common Stock are shareholders of the Company andcontinue to be subject to all of the risks associated with aninvestment in the Company and all of its businesses, assets andliabilities. Such attribution and the equity structure of theCompany do not affect title to the assets or responsibility forthe liabilities of the Company or any of its subsidiaries. Theresults of operations or financial condition of one Group couldaffect the results of operations or financial condition of theother Group. Net losses of either Group, and dividends or distri-butions on, or repurchases of, Circuit City Group Common Stockor CarMax Group Common Stock will reduce funds legallyavailable for dividends on, or repurchases of, both stocks.Accordingly, the Company’s consolidated financial statementsincluded herein should be read in conjunction with the financialstatements of each Group and the Company's SEC filings.

The financial statements of the Company reflect each Group’sbusinesses as well as the allocation of the Company’s assets,liabilities, expenses and cash flows between the Groups in accor-dance with the policies adopted by the board of directors. Thesepolicies may be modified or rescinded, or new policies may beadopted, at the sole discretion of the board of directors, althoughthe board of directors has no present plans to do so. These man-agement and allocation policies include the following:

(A) FINANCIAL ACTIVITIES: Most financial activities are man-aged by the Company on a centralized basis. Such financialactivities include the investment of surplus cash and theissuance and repayment of short-term and long-term debt. Debtof the Company is either allocated between the Groups (pooleddebt) or is allocated in its entirety to one Group. The pooled debtbears interest at a rate based on the average pooled debt balance.Expenses related to increases in pooled debt are reflected in theweighted average interest rate of such pooled debt.

(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporategeneral and administrative costs and other shared services gen-erally have been allocated to the Groups based upon utilization

of such services by each Group. Where determinations based onutilization alone have been impractical, other methods and crite-ria are used that management believes are equitable and providea reasonable estimate of the costs attributable to each Group.

(C) INCOME TAXES: The Groups are included in the consoli-dated federal income tax return and in certain state tax returnsfiled by the Company. Accordingly, the financial statement pro-vision and the related tax payments or refunds are reflected ineach Group’s financial statements in accordance with theCompany’s tax allocation policy for such Groups. In general, thispolicy provides that the consolidated tax provision and relatedtax payments or refunds are allocated between the Groups basedprincipally upon the financial income, taxable income, creditsand other amounts directly related to each Group. Tax benefitsthat cannot be used by the Group generating such attributes, butcan be utilized on a consolidated basis, are allocated to theGroup that generated such benefits.

On June 15, 1999, the board of directors declared a two-for-one split of the outstanding Circuit City Group Common Stock inthe form of a 100 percent stock dividend. All share, earnings pershare and dividends per share calculations for the Circuit CityGroup included in the accompanying consolidated financialstatements reflect this stock split.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(A) PRINCIPLES OF CONSOLIDATION: The consolidated financial

statements include the accounts of the Circuit City Group andthe CarMax Group, which combined comprise all accounts of theCompany. All significant intercompany balances and transactionshave been eliminated in consolidation.

(B) CASH AND CASH EQUIVALENTS: Cash equivalents of$408,778,000 at February 28, 2001, and $583,506,000 atFebruary 29, 2000, consist of highly liquid debt securities withoriginal maturities of three months or less.

(C) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For trans-fers of financial assets that qualify as sales, the Company mayretain interest-only strips, one or more subordinated tranches, resid-ual interests in a securitization trust, servicing rights and a cashreserve account, all of which are retained interests in the securitizedreceivables. These retained interests are measured based on the fairvalue at the date of transfer. The Company determines fair valuebased on the present value of future expected cash flows usingmanagement’s best estimates of the key assumptions such asfinance charge income, default rates, payment rates, forward yieldcurves and discount rates appropriate for the type of asset and risk.Retained interests are included in net accounts receivable and arecarried at fair value with changes in fair value reflected in earnings.

(D) FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying valueof the Company’s financial instruments, excluding interest rateswaps held for hedging purposes, approximates fair value. Creditrisk is the exposure created by the potential nonperformance ofanother material party to an agreement because of changes ineconomic, industry or geographic factors. The Company mitigatescredit risk by dealing only with counterparties that are highlyrated by several financial rating agencies. Accordingly, theCompany does not anticipate material loss for nonperformance.

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The Company broadly diversifies all financial instruments alongindustry, product and geographic areas.

(E) INVENTORY: Inventory is stated at the lower of cost or mar-ket. Cost is determined by the average cost method for the CircuitCity Group’s inventory and by specific identification for theCarMax Group’s vehicle inventory. Parts and labor used to recon-dition vehicles, as well as transportation and other incrementalexpenses associated with acquiring vehicles, are included in theCarMax Group’s inventory.

(F) PROPERTY AND EQUIPMENT: Property and equipment isstated at cost less accumulated depreciation and amortization.Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives.

Property held under capital lease is stated at the lower of thepresent value of the minimum lease payments at the inception ofthe lease or market value and is amortized on a straight-linebasis over the lease term or the estimated useful life of the asset,whichever is shorter.

(G) COMPUTER SOFTWARE COSTS: The Company accounts forcomputer software costs in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position98-1, “Accounting for the Costs of Computer Software Developedor Obtained for Internal Use.” Once the capitalization criteria ofSOP 98-1 have been met, external direct costs of materials andservices used in the development of internal-use software andpayroll and payroll-related costs for employees directly involvedin the development of internal-use software are capitalized.Amounts capitalized are amortized on a straight-line basis overa period of three to five years.

(H) INTANGIBLE ASSETS: Amounts paid for acquired businessesin excess of the fair value of the net tangible assets acquired arerecorded as goodwill, which is amortized on a straight-line basisover 15 years, and covenants not to compete, which are amor-tized on a straight-line basis over the life of the covenant not toexceed five years. Both goodwill and covenants not to competeare included in other assets on the accompanying consolidatedbalance sheets. The carrying values of intangible assets are peri-odically reviewed by the Company and impairments are recog-nized when the future undiscounted operating cash flows expectedfrom such intangible assets are less than the carrying values.

(I) PRE-OPENING EXPENSES: Effective March 1, 1999, theCompany adopted SOP 98-5, “Reporting on the Costs of Start-UpActivities.” SOP 98-5 requires costs of start-up activities, includ-ing organization and pre-opening costs, to be expensed asincurred. Prior to fiscal 2000, the Company capitalized pre-open-ing costs for new store locations. Beginning in the month afterthe store opened for business, the pre-opening costs were amor-tized over the remainder of the fiscal year.

(J) INCOME TAXES: The Company accounts for income taxes inaccordance with SFAS No. 109, “Accounting for Income Taxes.”Deferred income taxes reflect the impact of temporary differ-ences between the amounts of assets and liabilities recognizedfor financial reporting purposes and the amounts recognized forincome tax purposes, measured by applying currently enactedtax laws. The Company recognizes deferred tax assets if it ismore likely than not that a benefit will be realized.

(K) REVENUE RECOGNITION: The Company recognizes revenuewhen the earnings process is complete, generally at either the timeof sale to a customer or upon delivery to a customer.

(L) DEFERRED REVENUE: The Circuit City Group sells its ownextended warranty contracts and extended warranty contracts onbehalf of unrelated third parties. The contracts extend beyond thenormal manufacturer’s warranty period, usually with terms(including the manufacturer’s warranty period) between 12 and 60months. Commission revenue for the unrelated third-partyextended warranty plans is recognized at the time of sale, becausethe third parties are the primary obligors under these contracts.Inasmuch as Circuit City is the primary obligor on its own con-tracts, all revenue from the sale of these contracts is deferred andamortized on a straight-line basis over the life of the contracts.Incremental direct costs related to the sale of contracts are deferredand charged to expense in proportion to the revenue recognized.

The CarMax Group sells service contracts on behalf of unre-lated third parties and, prior to July 1997, sold its own contractsat one location where third-party warranty sales were not per-mitted. Contracts usually have terms of coverage between 12and 72 months. Commission revenue for the unrelated third-party service contracts is recognized at the time of sale, becausethe third parties are the primary obligors under these contracts.Inasmuch as CarMax is the primary obligor on its own contracts,all revenue from the sale of these contracts was deferred andamortized over the life of the contracts consistent with the pat-tern of repair experience of the industry. Incremental direct costsrelated to the sale of contracts were deferred and charged toexpense in proportion to the revenue recognized.

(M) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operatingprofits generated by the Company’s finance operations are recordedas a reduction to selling, general and administrative expenses.

(N) ADVERTISING EXPENSES: All advertising costs are expensedas incurred.

(O) NET EARNINGS (LOSS) PER SHARE: The Company calculatesearnings per share based upon SFAS No. 128, “Earnings perShare.” Basic net earnings per share attributed to Circuit CityGroup Common Stock is computed by dividing net earningsattributed to Circuit City Group Common Stock, including theCircuit City Group's retained interest in the CarMax Group, bythe weighted average number of shares of Circuit City GroupCommon Stock outstanding. Diluted net earnings per shareattributed to Circuit City Group Common Stock is computed bydividing net earnings attributed to Circuit City Group CommonStock, which includes the Circuit City Group's retained interestin the CarMax Group, by the weighted average number of sharesof Circuit City Group Common Stock outstanding and dilutivepotential Circuit City Group Common Stock.

Basic net earnings (loss) per share attributed to CarMaxGroup Common Stock is computed by dividing net earnings(loss) attributed to CarMax Group Common Stock by theweighted average number of shares of CarMax Group CommonStock outstanding. Diluted net earnings per share attributed toCarMax Group Common Stock is computed by dividing netearnings attributed to CarMax Group Common Stock by theweighted average number of shares of CarMax Group Common

Stock outstanding and dilutive potential CarMax GroupCommon Stock.

(P) STOCK-BASED COMPENSATION: The Company accounts forstock-based compensation in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting For Stock Issued toEmployees,” and provides the pro forma disclosures of SFAS No.123, “Accounting for Stock-Based Compensation.”

(Q) DERIVATIVE FINANCIAL INSTRUMENTS: The Company entersinto interest rate swap agreements to manage exposure to interestrates and to more closely match funding costs to the use of funding.Swaps entered into by a seller as part of a sale of financial assetsare considered proceeds at fair value in the determination of thegain or loss on the sale. If such a swap were to be terminated, theimpact on the fair value of the financial asset created by the sale ofthe related receivables would be estimated and included in earnings.

(R) RISKS AND UNCERTAINTIES: The Circuit City Group is a lead-ing national retailer of brand-name consumer electronics, personalcomputers and entertainment software. The diversity of the CircuitCity Group's products, customers, suppliers and geographic opera-tions reduces the risk that a severe impact will occur in the nearterm as a result of changes in its customer base, competition,sources of supply or markets. It is unlikely that any one eventwould have a severe impact on the Company’s operating results.

The CarMax Group is a used- and new-car retail business. Thediversity of the CarMax Group’s customers and suppliers reducesthe risk that a severe impact will occur in the near term as aresult of changes in its customer base, competition or sources ofsupply. However, because of the CarMax Group’s limited overallsize, management cannot assure that unanticipated events willnot have a negative impact on the Company.

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues andexpenses and the disclosure of contingent assets and liabilities.Actual results could differ from those estimates.

(S) RECLASSIFICATIONS: Certain amounts in prior years have beenreclassified to conform to classifications adopted in fiscal 2001.

3. BUSINESS ACQUISITIONSThe CarMax Group acquired the franchise rights and the relatedassets of one new-car dealership for an aggregate cost of $1.3million in fiscal 2001, five new-car dealerships for an aggregatecost of $34.8 million in fiscal 2000 and four new-car dealershipsfor an aggregate cost of 49.6 million in fiscal 1999. These acquisi-tions were financed through available cash resources and, in fiscal1999, the issuance of two promissory notes aggregating $8.0 mil-lion. Costs in excess of the fair value of the net tangible assetsacquired (primarily inventory) have been recorded as goodwill andcovenants not to compete. These acquisitions were accounted forunder the purchase method and the results of the operations ofeach acquired franchise were included in the accompanying con-solidated financial statements since the dates of acquisition.Unaudited pro-forma information related to these acquisitions isnot included because the impact of these acquisitions on theaccompanying consolidated financial statements is not material.

4. PROPERTY AND EQUIPMENTProperty and equipment, at cost, at February 28 or 29 is summa-rized as follows:

(Amounts in thousands) 2001 2000

Land and buildings (20 to 25 years)............ $ 178,042 $ 180,422Land held for sale........................................... 30,730 41,850Land held for development........................... 4,285 17,697Construction in progress ............................... 58,659 69,388Furniture, fixtures and equipment

(3 to 8 years).............................................. 874,367 750,737Leasehold improvements

(10 to 15 years).......................................... 619,782 586,005Capital leases, primarily buildings

(20 years).................................................... 12,471 12,471

1,778,336 1,658,570Less accumulated depreciation and

amortization .............................................. 789,389 693,389

Property and equipment, net........................ $ 988,947 $ 965,181

Land held for development is land owned for future sitesthat are scheduled to open more than one year beyond the fiscalyear reported.

5. DEBTLong-term debt at February 28 or 29 is summarized as follows:

(Amounts in thousands) 2001 2000

Term loans ............................................................ $230,000 $405,000Industrial Development Revenue Bonds due

through 2006 at various prime-based rates of interest ranging from 5.5% to 6.7%........ 4,400 5,419

Obligations under capital leases [NOTE 10] .......... 12,049 12,416Note payable ........................................................ 2,076 3,750

Total long-term debt........................................... 248,525 426,585Less current installments.................................... 132,388 177,344

Long-term debt, excluding current installments .................................................... $116,137 $249,241

In July 1994, the Company entered into a seven-year,$100,000,000 unsecured bank term loan. The loan was restructuredin August 1996 as a $100,000,000, six-year unsecured bank termloan. Principal is due in full at maturity with interest payable peri-odically at LIBOR plus 0.40 percent. At February 28, 2001, theinterest rate on the term loan was 5.97 percent.

In May 1995, the Company entered into a five-year,$175,000,000 unsecured bank term loan. As scheduled, theCompany used existing working capital to repay this term loanin May 2000.

In June 1996, the Company entered into a five-year,$130,000,000 unsecured bank term loan. Principal is due in full atmaturity with interest payable periodically at LIBOR plus 0.35 per-cent. At February 28, 2001, the interest rate on the term loan was5.73 percent. This term loan is due in June 2001 and was classi-

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fied as a current liability at February 28, 2001. Although theCompany has the ability to refinance this loan, it intends to repaythe debt using existing working capital.

The Company maintains a multi-year, $150,000,000 unsecuredrevolving credit agreement with four banks. The agreement callsfor interest based on both committed rates and money marketrates and a commitment fee of 0.18 percent per annum. Theagreement was entered into as of August 31, 1996, and terminatesAugust 31, 2002. No amounts were outstanding under the revolv-ing credit agreement at February 28, 2001, or February 29, 2000.

The Industrial Development Revenue Bonds are collateralizedby land, buildings and equipment with an aggregate carryingvalue of approximately $6,243,000 at February 28, 2001, and$8,404,000 at February 29, 2000.

In November 1998, the CarMax Group entered into a four-year, unsecured $5,000,000 promissory note. Principal is dueannually with interest payable periodically at 8.25 percent.

The scheduled aggregate annual principal payments on long-term obligations for the next five fiscal years are as follows:2002—$132,388,000; 2003—$102,073,000; 2004—$1,410,000;2005—$2,521,000; 2006—$1,083,000.

Under certain of the debt agreements, the Company must meetfinancial covenants relating to minimum tangible net worth, cur-rent ratios and debt-to-capital ratios. The Company was in com-pliance with all such covenants at February 28, 2001, andFebruary 29, 2000.

Short-term debt is funded through committed lines of creditand informal credit arrangements, as well as the revolving creditagreement. Amounts outstanding and committed lines of creditavailable are as follows:

Years Ended February 28 or 29

(Amounts in thousands) 2001 2000

Average short-term debt outstanding .......... $ 56,065 $ 44,692Maximum short-term debt outstanding....... $365,275 $411,791Aggregate committed lines of credit ............. $360,000 $370,000

The weighted average interest rate on the outstanding short-term debt was 6.8 percent during fiscal 2001, 5.6 percent duringfiscal 2000 and 5.1 percent during fiscal 1999.

The Company capitalizes interest in connection with the con-struction of certain facilities and software developed or obtainedfor internal use. Interest capitalized amounted to $2,121,000 in fis-cal 2001, $3,420,000 in fiscal 2000 and $5,423,000 in fiscal 1999.

6. INCOME TAXESThe Company files a consolidated federal income tax return. Thecomponents of the provision for income taxes on earnings fromcontinuing operations are as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Current:Federal ...................................... $69,832 $140,119 $ 99,228State .......................................... 10,167 17,756 13,148

79,999 157,875 112,376

Deferred:Federal ...................................... 17,999 41,762 16,718State .......................................... 557 1,291 517

18,556 43,053 17,235

Provision for income taxes ......... $98,555 $200,928 $129,611

The effective income tax rate differed from the federal statu-tory income tax rate as follows:

Years Ended February 28 or 292001 2000 1999

Federal statutory income tax rate .... 35% 35% 35%State and local income taxes,

net of federal benefit .................... 3% 3% 3%

Effective income tax rate................... 38% 38% 38%

In accordance with SFAS No. 109, the tax effects of temporarydifferences that give rise to a significant portion of the deferredtax assets and liabilities at February 28 or 29 are as follows:

(Amounts in thousands) 2001 2000

Deferred tax assets:Inventory ................................................. $ — $ 2,609Accrued expenses................................... 48,126 33,484Other......................................................... 7,546 7,476

Total gross deferred tax assets ....... 55,672 43,569

Deferred tax liabilities:Depreciation and amortization ............ 46,338 51,035Deferred revenue .................................... 32,825 29,656Securitized receivables .......................... 51,519 18,988Inventory ................................................. 16,376 —Prepaid expenses.................................... 12,417 26,111Other......................................................... 3,625 6,651

Total gross deferred tax liabilities ... 163,100 132,441

Net deferred tax liability............................. $107,428 $ 88,872

Based on the Company’s historical and current pretax earnings,management believes the amount of gross deferred tax assets willmore likely than not be realized through future taxable income;therefore, no valuation allowance is necessary.

7. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS(A) 401(k) PLAN: Effective August 1, 1999, the Company began

sponsoring a 401(k) Plan for all employees meeting certain eligibil-ity criteria. Under the Plan, eligible employees can contribute up to15 percent of their salaries, and the Company matches a portion ofthose associate contributions. The Company's expense for this planwas $4,682,000 in fiscal 2001 and $2,475,000 in fiscal 2000.

(B) PREFERRED STOCK: In conjunction with the Company’sShareholders Rights Plan as amended and restated, preferredstock purchase rights were distributed as a dividend at the rateof one right for each share of Circuit City Group Common Stockand CarMax Group Common Stock. The rights are exercisableonly upon the attainment of, or the commencement of a tenderoffer to attain, a specified ownership interest in the Company bya person or group. When exercisable, each Circuit City rightwould entitle shareholders to buy one eight-hundredth of a shareof Cumulative Participating Preferred Stock, Series E, $20 parvalue, at an exercise price of $125 per share subject to adjust-ment. Each CarMax right, when exercisable, would entitle share-holders to buy one four-hundredth of a share of CumulativeParticipating Preferred Stock, Series F, $20 par value, at an exer-cise price of $100 per share subject to adjustment. A total of1,000,000 shares of such preferred stock, which have preferentialdividend and liquidation rights, have been designated. No suchshares are outstanding. In the event that an acquiring person orgroup acquires the specified ownership percentage of theCompany’s common stock (except pursuant to a cash tenderoffer for all outstanding shares determined to be fair by theboard of directors) or engages in certain transactions with theCompany after the rights become exercisable, each right will beconverted into a right to purchase, for half the current marketprice at that time, shares of the related Group stock valued attwo times the exercise price. The Company also has 1,000,000shares of undesignated preferred stock authorized of which noshares are outstanding.

(C) VOTING RIGHTS: The holders of both series of commonstock and any series of preferred stock outstanding and entitledto vote together with the holders of common stock will votetogether as a single voting group on all matters on which com-mon shareholders generally are entitled to vote other than amatter on which the common stock or either series thereof orany series of preferred stock would be entitled to vote as a sepa-rate voting group. On all matters on which both series of com-mon stock would vote together as a single voting group, (i) eachoutstanding share of Circuit City Group Common Stock shallhave one vote and (ii) each outstanding share of CarMax GroupCommon Stock shall have a number of votes based on theweighted average ratio of the market value of a share ofCarMax Group Common Stock to a share of Circuit City GroupCommon Stock. If shares of only one series of common stockare outstanding, each share of that series shall be entitled toone vote. If either series of common stock is entitled to vote asa separate voting group with respect to any matter, each shareof that series shall, for purposes of such vote, be entitled to onevote on such matter.

(D) RESTRICTED STOCK: The Company has issued restrictedstock under the provisions of the 1994 Stock Incentive Planwhereby management and key employees are granted restrictedshares of Circuit City Group Common Stock or CarMax GroupCommon Stock. Shares are awarded in the name of theemployee, who has all the rights of a shareholder, subject tocertain restrictions or forfeitures. Restrictions on the awards

generally expire three to seven years from the date of grant.Total restricted stock awards of 1,483,358 shares of Circuit CityGroup Common Stock were granted to eligible employees in fis-cal 2001. Approximately 1,047,000 of those shares were grantedas a one-for-one replacement for cancelled options that wereoriginally granted on June 13, 2000. Options held by seniormanagement were excluded from this replacement grant.Approximately 782,000 of those shares vest two-and-one-halfyears from the date of grant and approximately 265,000 sharesvest four to five years from the grant date with acceleratedvesting if certain performance factors are met. The market valueat the date of grant of all shares granted has been recorded asunearned compensation and is a component of stockholders’equity. Unearned compensation is expensed over the restrictionperiods. In fiscal 2001, a total of $11,364,700 was charged tooperations ($12,095,900 in fiscal 2000 and $9,167,700 in fiscal1999). As of February 28, 2001, 2,364,051 restricted shares ofCircuit City Group Common Stock and 56,667 restricted sharesof CarMax Group Common Stock were outstanding.

(E) EMPLOYEE STOCK PURCHASE PLANS: The Company hasEmployee Stock Purchase Plans for all employees meeting cer-tain eligibility criteria. Under the Circuit City Group Plan andthe CarMax Group Plan, eligible employees may purchaseshares of Circuit City Group Common Stock or CarMax GroupCommon Stock, subject to certain limitations. For each $1.00contributed by employees under the Plans, the Companymatches $0.15. Purchases are limited to 10 percent of anemployee’s eligible compensation, up to a maximum of $7,500per year. At February 28, 2001, a total of 2,501,731 sharesremained available under the Circuit City Group Plan and581,599 shares remained available under the CarMax GroupPlan. During fiscal 2001, 862,315 shares of Circuit City GroupCommon Stock were issued to or purchased on the open marketfor employees (501,984 shares in fiscal 2000 and 858,710 sharesin fiscal 1999), and 477,094 shares of CarMax Group CommonStock were issued to or purchased on the open market on behalfof employees (580,000 in fiscal 2000 and 268,532 in fiscal1999). The average price per share of Circuit City GroupCommon Stock purchased under the Plan was $29.93 in fiscal2001, $41.70 in fiscal 2000 and $21.69 in fiscal 1999. The aver-age price per share of CarMax Group Common Stock purchasedunder the Plan was $4.18 in fiscal 2001, $3.68 in fiscal 2000and $7.56 in fiscal 1999. The Company match or purchase pricediscount totaled $2,766,500 in fiscal 2001, $2,903,800 in fiscal2000 and $2,984,500 in fiscal 1999.

(F) STOCK INCENTIVE PLANS: Under the Company’s stock incen-tive plans, nonqualified stock options may be granted to manage-ment, key employees and outside directors to purchase shares ofCircuit City Group Common Stock or CarMax Group CommonStock. The exercise price for nonqualified options is equal to, orgreater than, the market value at the date of grant. Options gener-ally are exercisable over a period of from one to 10 years from thedate of grant.

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TABLE 1 2001 2000 1999

Weighted Average Weighted Average Weighted Average(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price

Circuit City Group:Outstanding at beginning of year................ 7,380 $25.07 8,894 $18.25 9,988 $16.00Granted ............................................................ 4,280 34.80 1,564 40.75 1,080 21.17Exercised.......................................................... (1,526) 23.64 (2,864) 12.65 (2,008) 8.77Cancelled.......................................................... (1,414) 34.25 (214) 22.06 (166) 16.80

Outstanding at end of year........................... 8,720 $28.60 7,380 $25.07 8,894 $18.25

Options exercisable at end of year .............. 3,158 $21.86 1,258 $13.89 2,966 $12.02

CarMax Group:Outstanding at beginning of year................ 3,324 $ 3.87 4,380 $ 1.77 4,822 $ 1.49Granted ............................................................ 1,281 1.70 1,132 5.89 205 8.63Exercised.......................................................... (56) 0.22 (2,027) 0.22 (543) 0.22Cancelled.......................................................... (442) 4.67 (161) 6.94 (104) 10.54

Outstanding at end of year........................... 4,107 $ 3.16 3,324 $ 3.87 4,380 $ 1.77

Options exercisable at end of year .............. 1,943 $ 2.94 1,203 $ 2.54 1,566 $ 0.96

TABLE 2 Options Outstanding Options Exercisable

Weighted Average(Shares in thousands) Number Remaining Weighted Average Number Weighted AverageRange of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price

Circuit City Group:$ 9.09 to 14.75 ............................................ 1,344 3.8 $14.10 879 $13.93

15.18 to 18.00............................................. 1,067 3.0 17.24 876 17.2318.43 to 25.28............................................. 864 4.1 21.11 212 20.7829.50............................................................. 1,000 1.1 29.50 1,000 29.5034.84 to 35.21............................................. 3,038 7.2 35.21 — —35.22 to 47.53............................................. 1,407 5.4 40.72 191 40.81

Total.................................................................. 8,720 4.9 $28.60 3,158 $21.86

CarMax Group:$ 0.22............................................................. 1,578 1.0 $ 0.22 1,338 $ 0.22

1.63............................................................. 1,094 6.0 1.63 — —3.22 to 6.25.............................................. 1,011 4.7 5.89 305 6.078.68 to16.31.............................................. 424 3.4 11.55 300 11.91

Total.................................................................. 4,107 3.5 $ 3.16 1,943 $ 2.94

A summary of the status of the Company’s stock optionsand changes during the years ended February 28, 2001,February 29, 2000, and February 28, 1999, are shown in Table 1.Table 2 summarizes information about stock options outstand-ing as of February 28, 2001.

The Company applies APB Opinion No. 25 and related inter-pretations in accounting for its stock option plans. Accordingly,no compensation cost has been recognized. Had compensationcost been determined based on the fair value at the grant dateconsistent with the methods of SFAS No. 123, the net earningsand net earnings per share attributed to the Circuit City Group andthe net earnings (loss) and net earnings (loss) per share attributed

to the CarMax Group would have changed to the pro formaamounts indicated in the following table. In accordance with thetransition provisions of SFAS No. 123, the pro forma amountsreflect options with grant dates subsequent to March 1, 1995.Therefore, the full impact of calculating compensation cost forstock options under SFAS No. 123 is not reflected in the proforma net earnings (loss) amounts presented because compensa-tion cost is reflected over the options’ vesting periods and com-pensation cost of options granted prior to March 1, 1995, is notconsidered. The pro forma effect on fiscal year 2001 may not berepresentative of the pro forma effects on net earnings (loss) forfuture years.

(Amounts in thousands Years Ended February 28 or 29except per share data) 2001 2000 1999

Circuit City Group:Earnings from continuing

operations:As reported........................... $149,247 $327,574 $216,927Pro forma ............................. 136,957 319,337 211,025

Net earnings:As reported........................... $149,247 $197,334 $148,381Pro forma ............................. 136,957 189,097 142,479

Earnings per share from continuing operations:Basic – as reported.............. $ 0.73 $ 1.63 $ 1.09Basic – pro forma................ 0.67 1.59 1.06Diluted – as reported .......... $ 0.73 $ 1.60 $ 1.08Diluted – pro forma............ 0.67 1.56 1.05

Net earnings per share:Basic – as reported.............. $ 0.73 $ 0.98 $ 0.75Basic – pro forma................ 0.67 0.94 0.72Diluted – as reported .......... $ 0.73 $ 0.96 $ 0.74Diluted – pro forma............ 0.67 0.93 0.71

CarMax Group:Net earnings (loss):

As reported........................... $ 11,555 $ 256 $ (5,457)Pro forma ............................. 11,345 75 (5,537)

Net earnings (loss) per share:Basic – as reported.............. $ 0.45 $ 0.01 $ (0.24)Basic – pro forma................ 0.44 0.00 (0.24)Diluted – as reported .......... $ 0.43 $ 0.01 $ (0.24)Diluted – pro forma............ 0.42 0.00 (0.24)

For the purpose of computing the pro forma amounts indi-cated above, the fair value of each option on the date of grant isestimated using the Black-Scholes option-pricing model. Theweighted average assumptions used in the model are as follows:

2001 2000 1999

Circuit City Group:Expected dividend yield ................ 0.2% 0.2% 0.4%Expected stock volatility ............... 49% 38% 33%Risk-free interest rates................... 6% 6% 6%Expected lives (in years)................ 5 5 5

CarMax Group:Expected dividend yield ................ — — —Expected stock volatility ............... 71% 62% 50%Risk-free interest rates................... 7% 6% 6%Expected lives (in years)................ 4 4 3

Using these assumptions in the Black-Scholes model, theweighted average fair value of options granted for the CircuitCity Group is $17 in fiscal 2001, $17 in fiscal 2000 and $8 infiscal 1999; and for the CarMax Group, $1 in fiscal 2001, $3 infiscal 2000 and $3 in fiscal 1999.

8. EARNINGS (LOSS) PER SHAREReconciliations of the numerator and denominator of basic anddiluted earnings (loss) per share are presented below.

(Amounts in thousands Years Ended February 28 or 29except per share data) 2001 2000 1999

Circuit City Group:Weighted average

common shares........................ 203,774 201,345 198,304Dilutive potential

common shares:Options...................................... 885 2,145 1,700Restricted stock........................ 1,171 831 808

Weighted average common shares and dilutive potential common shares....... 205,830 204,321 200,812

Earnings from continuing operations available to common shareholders............. $149,247 $327,574 $216,927

Basic earnings per share from continuing operations ............ $ 0.73 $ 1.63 $ 1.09

Diluted earnings per share fromcontinuing operations ............ $ 0.73 $ 1.60 $ 1.08

CarMax Group:Weighted average

common shares ....................... 25,554 23,778 22,604Dilutive potential common

shares:Options ..................................... 1,332 1,814 —Restricted stock ....................... 94 196 —

Weighted average common shares and dilutive potential common shares ....................... 26,980 25,788 22,604

Net earnings (loss) available to common shareholders ............ $ 11,555 $ 256 $ (5,457)

Basic net earnings (loss) per share................................... $ 0.45 $ 0.01 $ (0.24)

Diluted net earnings (loss) per share................................... $ 0.43 $ 0.01 $ (0.24)

Certain options were outstanding and not included in thecomputation of diluted earnings per share because the options’exercise prices were greater than the average market price of thecommon shares. Options to purchase 8,469,700 shares of CircuitCity Group Common Stock ranging from $14.75 to $47.53 pershare were outstanding and not included in the calculation atthe end of fiscal 2001; 2,900 shares ranging from $43.03 to$47.53 per share at the end of fiscal 2000; and 2,000,000 sharesat $29.50 per share at the end of fiscal 1999. Options to pur-chase 1,357,200 shares of CarMax Group Common Stock rang-ing from $6.06 to $16.31 per share were outstanding and notincluded in the calculation at the end of fiscal 2001, and

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1,685,400 shares ranging from $3.90 to $16.31 per share werenot included at the end of fiscal 2000. Because the CarMaxGroup had a net loss in fiscal 1999, no dilutive potential sharesof CarMax Group Common Stock were included in the calcula-tion of diluted net loss per share.

9. PENSION PLANSThe Company has a noncontributory defined benefit pension plancovering the majority of full-time employees who are at least age21 and have completed one year of service. The cost of the pro-gram is being funded currently. Plan benefits generally are basedon years of service and average compensation. Plan assets consistprimarily of equity securities and included 160,000 shares ofCircuit City Group Common Stock at February 28, 2001, andFebruary 29, 2000. Contributions were $15,733,000 in fiscal2001, $12,123,000 in fiscal 2000 and $10,306,000 in fiscal 1999.

The following tables set forth the Pension Plan’s financialstatus and amounts recognized in the consolidated balancesheets as of February 28 or 29:

(Amounts in thousands) 2001 2000

Change in benefit obligation:Benefit obligation at beginning of year........ $113,780 $112,566Service cost....................................................... 14,142 14,678Interest cost....................................................... 9,045 7,557Actuarial loss (gain)......................................... 21,776 (16,870)Benefits paid..................................................... (2,994) (4,151)

Benefit obligation at end of year.................. $155,749 $113,780

Change in plan assets:Fair value of plan assets at beginning

of year.......................................................... $132,353 $ 95,678Actual return on plan assets .......................... (10,667) 28,703Employer contributions .................................. 15,733 12,123Benefits paid..................................................... (2,994) (4,151)

Fair value of plan assets at end of year......... $134,425 $132,353

Reconciliation of funded status:Funded status ................................................... $ (21,324) $ 18,573Unrecognized actuarial loss (gain)................ 16,961 (26,862)Unrecognized transition asset........................ (202) (404)Unrecognized prior service benefit ............... (285) (427)

Net amount recognized................................... $ (4,850) $ (9,120)

The components of net pension expense are as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Service cost.......................................... $14,142 $14,678 $11,004Interest cost.......................................... 9,045 7,557 6,202Expected return on plan assets.......... (11,197) (9,078) (7,794)Amortization of prior service cost .... (142) (134) (105)Amortization of transitional asset .... (202) (202) (202)Recognized actuarial (gain) loss....... (183) 87 —

Net pension expense........................... $11,463 $12,908 $ 9,105

Assumptions used in the accounting for the Pension Plan were:

Years Ended February 28 or 292001 2000 1999

Weighted average discount rate................... 7.5% 8.0% 6.8%Rate of increase in compensation levels ...... 6.0% 6.0% 5.0%Expected rate of return on plan assets ......... 9.0% 9.0% 9.0%

The Company also has an unfunded nonqualified plan thatrestores retirement benefits for certain senior executives who areaffected by Internal Revenue Code limitations on benefits providedunder the Company's Pension Plan. The projected benefit obliga-tion under this plan was $10.4 million at February 28, 2001, and$6.6 million at February 29, 2000.

10. LEASE COMMITMENTSThe Company conducts a substantial portion of its business inleased premises. The Company’s lease obligations are based uponcontractual minimum rates. For certain locations, amounts inexcess of these minimum rates are payable based upon specifiedpercentages of sales. Rental expense and sublease income for alloperating leases are summarized as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Minimum rentals ..................... $341,122 $322,598 $296,706Rentals based on sales

volume................................. 1,229 1,327 1,247Sublease income...................... (15,333) (16,425) (14,857)

Net rental expense .................. $327,018 $307,500 $283,096

The Company computes rent based on a percentage of salesvolumes in excess of defined amounts in certain store locations.Most of the Company’s other leases are fixed-dollar rental com-mitments, with many containing rent escalations based on theConsumer Price Index. Most provide that the Company paytaxes, maintenance, insurance and operating expenses applica-ble to the premises.

The initial term of most real property leases will expire withinthe next 20 years; however, most of the leases have options pro-viding for additional lease terms of five to 25 years at termssimilar to the initial terms.

Future minimum fixed lease obligations, excluding taxes,insurance and other costs payable directly by the Company, as ofFebruary 28, 2001, were:

Operating Operating(Amounts in thousands) Capital Lease SubleaseFiscal Leases Commitments Income

2002.................................................. $ 1,725 $ 328,205 $(13,350)2003.................................................. 1,726 325,116 (12,638)2004.................................................. 1,768 322,072 (11,142)2005.................................................. 1,798 320,038 (10,193)2006.................................................. 1,807 317,279 (9,132)After 2006........................................ 12,859 3,255,150 (34,437)

Total minimum lease payments ..... 21,683 $4,867,860 $(90,892)

Less amounts representing interest ......................................... (9,634)

Present value of net minimum capital lease payments [NOTE 5].... $12,049

In fiscal 2001, the Company entered into sale-leasebacktransactions with unrelated parties at an aggregate selling priceof $61,526,000 ($36,795,000 in fiscal 2000 and $235,500,000 infiscal 1999). The Company does not have continuing involvementunder sale-leaseback transactions.

11. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATIONAdvertising expense from continuing operations, which isincluded in selling, general and administrative expenses in theaccompanying consolidated statements of earnings, amounted to$467,786,000 (3.6 percent of net sales and operating revenues)in fiscal 2001, $438,781,000 (3.5 percent of net sales and operat-ing revenues) in fiscal 2000 and $426,359,000 (3.9 percent ofnet sales and operating revenues) in fiscal 1999.

12. SECURITIZATIONS(A) CREDIT CARD SECURITIZATIONS: The Company enters into

securitization transactions, which allow for the sale of creditcard receivables to unrelated entities, to finance the consumerrevolving credit receivables generated by its finance operation.In these securitizations, the Company retains servicing rights andsubordinated interests.

Private-label credit card receivables are financed through amaster trust securitization program. During fiscal year 2001, a$300 million, five-year public securitization related to the private-label card matured and was paid off. The Company entered into a$275 million, three-year public securitization in fiscal 2001. As ofFebruary 28, 2001, the master trust securitization program had acapacity of $1.31 billion. The master trust agreement has norecourse provisions.

Bankcard receivables also are financed through a master trustsecuritization program. Provisions under the master trust agreementprovide recourse to the Company for any cash flow deficiencies on$188 million of the receivables sold. The Company believes that asof February 28, 2001, no liability existed under the recourse provi-sions. The bankcard securitization program had a total programcapacity of $1.94 billion as of February 28, 2001.

At February 28, 2001, the total principal amount of loansmanaged or securitized was $2,799 million. Of the total loans,the principal amount of loans securitized was $2,754 million andthe principal amount of loans held for sale was $45 million. Theprincipal amount of loans that were 31 days or more delinquentwas $192.3 million at February 28, 2001. The credit losses net ofrecoveries were $229.9 million for fiscal 2001.

The Company receives annual servicing compensationapproximating 2 percent of the outstanding principal loan balanceof the receivables and retains the rights to future cash flows aris-ing after the investors in the securitization trusts have receivedthe return for which they contracted. The servicing fees specifiedin the credit card securitization agreements adequately compen-sate the finance operation for servicing the securitized assets.Accordingly, no servicing asset or liability has been recorded.

The table below summarizes certain cash flows received fromand paid to securitization trusts:

Year Ended (Amounts in thousands) February 28, 2001

Proceeds from new securitizations .............................. $1,092,500Proceeds from collections reinvested

in previous credit card securitizations................... $ 1,730,511Servicing fees received .................................................. $ 52,044Other cash flows received on retained interests*........ $ 173,775

* This amount represents total cash flows received from retained interests bythe transferor other than servicing fees, including cash flows from interest-onlystrips and cash above the minimum required level in cash collateral accounts.

In determining the fair value of retained interests, theCompany estimates future cash flows using management’s bestestimates of key assumptions such as finance charge income,default rates, payment rates, forward yield curves and discountrates. The Company employs a risk-based pricing strategy thatincreases the stated annual percentage rate for accounts thathave a higher predicted risk of default. Accounts with a lowerrisk profile also may qualify for promotional financing.

Rights recorded for future finance income from servicedassets that exceed the contractually specified servicing fees arecarried at fair value and amounted to $131.0 million at February28, 2001, and are included in net accounts receivable. Gains onsales of $182.6 million were recorded in fiscal 2001.

The fair value of retained interests at February 28, 2001, was$246.1 million with a weighted-average life ranging from 0.4years to 3 years. The following table shows the key economicassumptions used in measuring the fair value of retained interestsat February 28, 2001, and a sensitivity analysis showing the

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hypothetical effect on the fair value of those interests whenthere are unfavorable variations from the assumptions used. Keyeconomic assumptions at February 28, 2001, are not materiallydifferent than assumptions used to measure the fair value ofretained interests at the time of securitization. These sensitivi-ties are hypothetical and should be used with caution. In thistable, the effect of a variation in a particular assumption on thefair value of the retained interest is calculated without changingany other assumption; in reality, changes in one factor mayresult in changes in another, which might magnify or counter-act the sensitivities.

Impact on Impact on Assumptions Fair Value Fair Value

(Dollar amounts Used of 10% of 20%in thousands) (Annual) Adverse Change Adverse Change

Payment rate ........... 7.1—11.3% $10,592 $20,107Default rate.............. 7.0—14.3% $21,159 $42,318Discount rate ........... 10.0—15.0% $ 2,973 $ 5,892

(B) AUTOMOBILE LOAN SECURITIZATIONS: The Company alsohas an asset securitization program, operated through a specialpurpose subsidiary on behalf of the CarMax Group, to financethe consumer installment credit receivables generated by itsautomobile loan finance operation. This automobile loan securi-tization program had a total program capacity of $450 millionas of February 28, 2001, with no recourse provisions. In October1999, the Company formed a second securitization facility thatallowed for a $644 million securitization of automobile loanreceivables in the public market. Because of the amortization ofthe automobile loan receivables and corresponding securities inthis facility, the program had a capacity of $329 million as ofFebruary 28, 2001, with no recourse provisions. In January2001, the Company sold $655 million of receivables in the pub-lic market through an additional owner trust structure. The pro-gram had a capacity of $655 million as of February 28, 2001,with no recourse provisions. In these securitizations, theCompany retains servicing rights and subordinated interests.The Company’s retained interests are subject to credit and pre-payment risks on the transferred financial assets.

At February 28, 2001, the total principal amount of loansmanaged or securitized was $1,296 million. Of the total loans,the principal amount of loans securitized was $1,284 million andthe principal amount of loans held for sale or investment was$12 million. The principal amount of loans that were 31 days ormore delinquent was $18.1 million at February 28, 2001. Thecredit losses net of recoveries were $7.2 million for fiscal 2001.

The Company receives annual servicing fees approximating 1 percent of the outstanding principal balance of the securitizedautomobile loans and rights to future cash flows arising after theinvestors in the securitization trust have received the return forwhich they contracted. The servicing fee specified in the auto-mobile loan securitization agreements adequately compensatesthe finance operation for servicing the accounts. Accordingly, noservicing asset or liability has been recorded.

The table below summarizes certain cash flows received fromand paid to securitization trusts:

Year Ended (Amounts in thousands) February 28, 2001

Proceeds from new securitizations ................................ $619,525Proceeds from collections reinvested

in previous automobile loan securitizations........... $313,827Servicing fees received ................................................... $ 10,474Other cash flows received on retained interests*......... $ 39,265

* This amount represents total cash flows received from retained interests bythe transferor other than servicing fees, including cash flows from interest-onlystrips and cash above the minimum required level in cash collateral accounts.

In determining the fair value of retained interests, theCompany estimates future cash flows using management’s bestestimates of key assumptions such as finance charge income,default rates, prepayment rates and discount rates. The Companyemploys a risk-based pricing strategy that increases the statedannual percentage rate for accounts that have a higher predictedrisk of default. Accounts with a lower risk profile also may qual-ify for promotional financing.

Rights recorded for future finance income from servicedassets that exceed the contractually specified servicing fees arecarried at fair value and amounted to $42.0 million at February28, 2001, and are included in net accounts receivable. Gains onsales of $35.4 million were recorded in fiscal 2001.

The fair value of retained interests at February 28, 2001, was$74.1 million with a weighted-average life ranging from 1.5 yearsto 1.8 years. The table below shows the key economic assumptionsused in measuring the fair value of retained interests at February28, 2001, and a sensitivity analysis showing the hypotheticaleffect on the fair value of those interests when there are unfavor-able variations from the assumptions used. Key economic assump-tions at February 28, 2001, are not materially different thanassumptions used to measure the fair value of retained interests atthe time of securitization. These sensitivities are hypothetical andshould be used with caution. In this table, the effect of a variationin a particular assumption on the fair value of the retained interestis calculated without changing any other assumption; in reality,changes in one factor may result in changes in another, whichmight magnify or counteract the sensitivities.

Impact on Impact on Assumptions Fair Value Fair Value

(Dollar amounts Used of 10% of 20%in thousands) (Annual) Adverse Change Adverse Change

Prepayment speed..... 1.5—1.6% $1,840 $3,864Default rate ................ 1.0—1.2% $1,471 $3,050Discount rate.............. 12.0% $ 890 $1,786

13. INTEREST RATE SWAPSThe Company enters into amortizing swaps relating to automobileloan receivable securitizations to convert variable-rate financingcosts to fixed-rate obligations to better match funding costs to thereceivables being securitized. The Company entered into nine 40-month amortizing swaps with notional amounts totaling approxi-mately $735 million in fiscal 2001, four 40-month amortizingswaps with notional amounts totaling approximately $344 millionin fiscal 2000 and four 40-month amortizing swaps with notionalamounts totaling approximately $387 million in fiscal 1999. Theseswaps were entered into as part of sales of receivables and areincluded in the gain or loss on sales of receivables. The remainingtotal notional amount of all swaps related to the automobile loanreceivable securitizations was approximately $299 million atFebruary 28, 2001, $327 million at February 29, 2000, and $499million at February 28, 1999. The reduction in the total notionalamount of the CarMax interest rate swaps in fiscal 2001 and in fis-cal 2000 relates to the replacement of floating-rate securitizationswith a $655 million fixed-rate securitization in January 2001 and a$644 million fixed-rate securitization in October 1999.

The market and credit risks associated with interest rateswaps are similar to those relating to other types of financialinstruments. Market risk is the exposure created by potentialfluctuations in interest rates and is directly related to the producttype, agreement terms and transaction volume. The Companydoes not anticipate significant market risk from swaps, becausetheir use is to more closely match funding costs to the use of thefunding. Credit risk is the exposure to nonperformance ofanother party to an agreement. The Company mitigates creditrisk by dealing with highly rated counterparties.

14. CONTINGENT LIABILITIESIn the normal course of business, the Company is involved in var-ious legal proceedings. Based upon the Company’s evaluation ofthe information presently available, management believes that theultimate resolution of any such proceedings will not have a mate-rial adverse effect on the Company’s financial position, liquidityor results of operations.

15. APPLIANCE EXIT COSTSOn July 25, 2000, the Company announced plans to exit themajor appliance category to expand its selection of key con-sumer electronics and home office products in all Circuit CitySuperstores. This decision reflected significant sales weaknessand increased competition in the major appliance category andmanagement’s earnings expectations for these other products. Toexit the appliance business, the Company closed six distributioncenters and seven service centers in fiscal 2001 and expects toclose two distribution centers and one service center by July 31,2001. The majority of these properties are leased. The Companyis in the process of marketing these properties to be subleased.Circuit City maintains control over its in-home major appliancerepair business, although repairs are subcontracted to an unre-lated third party. In the second quarter of fiscal 2001, the

Company recorded appliance exit costs of $30 million. Most ofthese expenses are included in cost of sales, buying and ware-housing on the statement of earnings for fiscal 2001. There wereno adjustments to the exit costs as of February 28, 2001.

Approximately 850 employees have been terminated andapproximately 100 employees will be terminated as locationsclose or consolidate. These reductions were mainly in the service,distribution and merchandising functions. Because severance isbeing paid to employees on a bi-weekly schedule based on yearsof service, cash payments lag job eliminations. The exit costsalso include $17.8 million for lease termination costs and $5.0million, net of salvage value, for the write-down of fixed assets.

ExpensesPaid or Liability at

Total Assets February 28,(Amounts in millions) Exit Costs Written Off 2001

Lease termination costs ................. $17.8 $ 1.8 $16.0Fixed asset write-downs................ 5.0 5.0 —Employee termination benefits..... 4.4 2.2 2.2 Other ................................................. 2.8 2.8 —

Appliance exit costs ....................... $30.0 $11.8 $18.2

16. DISCONTINUED OPERATIONSOn June 16, 1999, Digital Video Express announced that itwould cease marketing the Divx home video system and discon-tinue operations, but that existing, registered customers wouldbe able to view discs during a two-year phase-out period. Theoperating results of Divx and the loss on disposal of the Divxbusiness have been segregated from continuing operations andreported as separate line items, after taxes, on the consolidatedstatements of earnings for the periods presented. Discontinuedoperations also have been segregated on the consolidated state-ments of cash flows for the periods presented. However, Divx isnot segregated on the consolidated balance sheets.

For fiscal 2001, the discontinued Divx operations had noimpact on the net earnings of Circuit City Stores, Inc. The lossfrom the discontinued Divx operations totaled $16.2 millionafter an income tax benefit of $9.9 million in fiscal 2000 and$68.5 million after an income tax benefit of $42.0 million in fis-cal 1999. The loss on the disposal of the Divx business totaled$114.0 million after an income tax benefit of $69.9 million infiscal 2000. The loss on the disposal includes a provision foroperating losses to be incurred during the phase-out period. Italso includes provisions for commitments under licensing agree-ments with motion picture distributors, the write-down of assetsto net realizable value, lease termination costs, employee sever-ance and benefit costs and other contractual commitments.

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The net liabilities of the discontinued Divx operationsreflected in the accompanying consolidated balance sheets as ofFebruary 28 or 29 are comprised of the following:

(Amounts in thousands) 2001 2000

Current assets..................................................... $ 8 $ 612Property and equipment, net........................... — 513Other assets ........................................................ 324 —Current liabilities............................................... (27,522) (32,650)Other liabilities .................................................. (14,082) (35,291)

Net liabilities of discontinued operations...... $(41,272) $(66,816)

17. OPERATING SEGMENT INFORMATIONThe Company conducts business in two operating segments:Circuit City and CarMax. These segments are identified andmanaged by the Company based on the different products andservices offered by each. Circuit City refers to the retail opera-tions bearing the Circuit City name and to all related operations,such as its finance operation. This segment is engaged in thebusiness of selling brand-name consumer electronics, personalcomputers and entertainment software. CarMax refers to theused- and new-car retail locations bearing the CarMax name andto all related operations, such as its finance operation. Financialinformation for these segments for fiscal 2001, 2000 and 1999are shown in Table 3.

TABLE 3

2001 Total(Amounts in thousands) Circuit City CarMax Segments

Revenues from external customers ................................................................... $10,458,037 $2,500,991 $12,959,028Interest expense ................................................................................................... 7,273 12,110 19,383Depreciation and amortization .......................................................................... 126,297 26,793 153,090Earnings from continuing operations before income taxes........................... 185,875 73,482 259,357Provision for income taxes ................................................................................ 70,637 27,918 98,555Earnings from continuing operations ............................................................... 115,238 45,564 160,802Total assets ........................................................................................................... $ 3,160,048 $ 710,953 $ 3,871,001

2000 Total(Amounts in thousands) Circuit City CarMax Segments

Revenues from external customers ................................................................... $10,599,406 $2,014,984 $12,614,390Interest expense ................................................................................................... 13,844 10,362 24,206Depreciation and amortization .......................................................................... 132,923 15,241 148,164Earnings from continuing operations before income taxes........................... 526,955 1,803 528,758Provision for income taxes ................................................................................ 200,243 685 200,928Earnings from continuing operations ............................................................... 326,712 1,118 327,830Total assets ........................................................................................................... $ 3,278,728 $ 675,495 $ 3,954,223

1999 Total(Amounts in thousands) Circuit City CarMax Segments

Revenues from external customers ................................................................... $ 9,344,170 $1,466,298 $10,810,468Interest expense ................................................................................................... 21,926 6,393 28,319Depreciation and amortization .......................................................................... 119,724 10,003 129,727Earnings (loss) from continuing operations before income taxes................. 379,630 (38,549) 341,081Income tax provision (benefit)........................................................................... 144,646 (15,035) 129,611Earnings (loss) from continuing operations..................................................... 234,984 (23,514) 211,470Total assets ........................................................................................................... $ 2,816,954 $ 571,198 $ 3,388,152

Earnings from continuing operations and total assets for Circuit City on this table exclude: (1) the Inter-Group Interest in CarMax and (2) the discontinued Divxoperations as discussed in Note 16.

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18. QUARTERLY FINANCIAL DATA (UNAUDITED)

(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Yearexcept per share data) 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000

Net sales and operating revenues.......... $3,074,851 $2,690,982 $3,179,781 $2,958,394 $2,887,269 $2,984,607 $3,817,127 $3,980,407 $12,959,028 $12,614,390

Gross profit ............................................... $ 683,262 $ 602,727 $ 673,465 $ 668,283 $ 582,128 $ 670,910 $ 856,467 $ 920,637 $ 2,795,322 $ 2,862,557

Net earnings (loss) attributed to:

Circuit City Group Common Stock:

Continuing operations .............. $ 57,123 $ 41,398 $ 55,341 $ 73,692 $ (64,407) $ 52,335 $ 101,190 $ 160,149 $ 149,247 $ 327,574

Discontinued operations........... $ — $ (130,240) $ — $ — $ — $ — $ — $ — $ — $ (130,240)

CarMax Group Common Stock....... $ 3,535 $ 646 $ 4,126 $ 775 $ 1,920 $ (757) $ 1,974 $ (408) $ 11,555 $ 256

Net earnings (loss) per share attributed to:

Circuit City Group Common Stock:

Basic:

Continuing operations....... $ 0.28 $ 0.21 $ 0.27 $ 0.37 $ (0.32) $ 0.26 $ 0.50 $ 0.79 $ 0.73 $ 1.63

Discontinued operations ... $ — $ (0.65) $ — $ — $ — $ — $ — $ — $ — $ (0.65)

Net earnings (loss).............. $ 0.28 $ (0.44) $ 0.27 $ 0.37 $ (0.32) $ 0.26 $ 0.50 $ 0.79 $ 0.73 $ 0.98

Diluted:

Continuing operations....... $ 0.28 $ 0.20 $ 0.27 $ 0.36 $ (0.32) $ 0.26 $ 0.49 $ 0.78 $ 0.73 $ 1.60

Discontinued operations..... $ — $ (0.64) $ — $ — $ — $ — $ — $ — $ — $ (0.64)

Net earnings (loss).............. $ 0.28 $ (0.44) $ 0.27 $ 0.36 $ (0.32) $ 0.26 $ 0.49 $ 0.78 $ 0.73 $ 0.96

CarMax Group Common Stock:

Basic ............................................ $ 0.14 $ 0.03 $ 0.16 $ 0.03 $ 0.08 $ (0.03) $ 0.08 $ (0.02) $ 0.45 $ 0.01

Diluted......................................... $ 0.13 $ 0.03 $ 0.15 $ 0.03 $ 0.07 $ (0.03) $ 0.07 $ (0.02) $ 0.43 $ 0.01

Independent Auditors� Report

The Board of Directors and Stockholders of Circuit City Stores, Inc.:

We have audited the accompanying consolidated balancesheets of Circuit City Stores, Inc. and subsidiaries as of February28, 2001 and February 29, 2000 and the related consolidatedstatements of earnings, stockholders’ equity and cash flows foreach of the fiscal years in the three-year period ended February28, 2001. These consolidated financial statements are the respon-sibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statementsbased on our audits.

We conducted our audits in accordance with auditing stan-dards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by

management, as well as evaluating the overall financial state-ment presentation. We believe that our audits provide a reason-able basis for our opinion.

In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the financial posi-tion of Circuit City Stores, Inc. and subsidiaries as of February 28,2001 and February 29, 2000 and the results of their operationsand their cash flows for each of the fiscal years in the three-yearperiod ended February 28, 2001 in conformity with accountingprinciples generally accepted in the United States of America.

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The common stock of Circuit City Stores, Inc. consists of twocommon stock series, which are intended to reflect the perfor-mance of the Company's two businesses. The Circuit City GroupCommon Stock is intended to track the performance of the CircuitCity business and related operations and the Group’s retainedinterest in the CarMax Group. The effects of the retained interestin the CarMax Group on the Circuit City Group’s financial state-ments are identified by the term “Inter-Group.” During the three-year period discussed in this annual report, the financial resultsfor the Company and the Circuit City Group also have includedthe Company's investment in Digital Video Express, which hasbeen discontinued. The CarMax Group Common Stock is intendedto track the performance of the CarMax stores and related opera-tions. The Circuit City Group’s retained interest is not consideredoutstanding CarMax Group Common Stock. Therefore, the netearnings or losses attributed to the retained interest are notincluded in the CarMax Group’s per share calculations.

Holders of Circuit City Group Common Stock and holders ofCarMax Group Common Stock are shareholders of the Companyand as such are subject to all of the risks associated with an invest-ment in the Company and all of its businesses, assets and liabili-ties. The results of operations or financial condition of one Groupcould affect the results of operations or financial condition of theother Group. The discussion and analysis for the Circuit City Grouppresented below should be read in conjunction with the discussionand analysis for Circuit City Stores, Inc. and for the CarMax Groupand in conjunction with all the Company’s SEC filings.

The Circuit City Group held a 74.6 percent interest in theCarMax Group at February 28, 2001, a 74.7 percent interest atFebruary 29, 2000, and a 76.6 percent interest at February 28, 1999.

RESULTS OF OPERATIONSSales GrowthTotal sales for the Circuit City Group decreased 1 percent in fiscal2001 to $10.46 billion. In fiscal 2000, total sales were $10.60 bil-lion, a 13 percent increase from $9.34 billion in fiscal 1999.

PERCENTAGE SALES CHANGE FROM PRIOR YEAR

Fiscal Total Comparable

2001...................................................................... (1)% (4)%2000...................................................................... 13 % 8 %1999...................................................................... 17 % 8 %1998...................................................................... 12 % (1)%1997...................................................................... 6 % (8)%

The fiscal 2001 total sales decline includes a 4 percent declinein the comparable store sales of the Circuit City business, partlyoffset by the net addition of 23 Circuit City Superstores. Through-out fiscal 2001, we experienced significant variability in theCircuit City comparable store sales pace. The sales pace in themajor appliance category softened significantly at the end of thefirst quarter and into the second quarter. In late July, weannounced plans to exit the appliance business and expand ourselection of key consumer electronics and home office products.A product profitability analysis had indicated that the appliance

category produced below-average profits. This analysis, com-bined with the declining sales pace and expected increases incompetition, led to the decision to exit the category. The exitfrom the appliance business and remerchandising of the appli-ance selling space was completed by the end of the third fiscalquarter. Nevertheless, the Circuit City business continued toexperience a highly variable comparable store sales pace, andsales softened substantially in the last two months of the fiscalyear. We believe the variability reflects the slower consumerspending experienced by most retailers during the second half ofthe year, some disruption to sales caused by the partial remodel-ing to remerchandise the appliance space, significant declines inaverage retails and industry-wide declines in desktop personalcomputer sales by year-end. Throughout the year, new technolo-gies, better-featured consumer electronics and the new andexpanded selections added to the store produced strong salesgrowth, although not always in line with our expectations.Excluding the appliance category from fiscal 2001 and fiscal2000 sales, comparable store sales rose 3 percent in fiscal 2001.

In addition to the partial remodels, we fully remodeled 25Superstores in central and south Florida and one Superstore inRichmond, Va., to a design that we believe is more contemporaryand easier to navigate. The full remodels offer better productadjacencies, shopping carts and baskets, more and highly visiblecash registers, better lighting and signs, and the expanded andnew product selections now available in all stores. The 23 newstores opened from August 2000 through February 2001 alsoreflect this new design, and all new stores planned for fiscal2002 will reflect this design. Consumer reaction to the designhas been positive, but the ability to meet our longer-term expecta-tions has been difficult to determine given the overall slowdownthat occurred during the second half of the fiscal year. In addition,the cost of remodeling and the disruption to sales in remodeledstores were higher than anticipated. Fiscal 2002 remodels willfollow a less costly design that can be completed over a shortertime period, but which we believe will offer similar benefits tothe consumer. We also will focus on new marketing programsdesigned to increase foot traffic at all Circuit City stores.

Geographic expansion is currently a limited contributor toCircuit City’s growth. We opened 23 new Circuit City Superstoresand relocated two Circuit City Superstores in fiscal 2001,increasing the store base 4 percent. New Superstores were addedto existing markets or built in one- or two-store markets giventhat we already operate stores in virtually all of the nation’s topmetropolitan markets.

From fiscal 1997 through fiscal 1998, a lack of significantconsumer electronics product introductions resulted in weakindustry sales. Geographic expansion was the primary contribu-tor to growth of the Circuit City business during this time. Theindustry began to emerge from this period of declining sales infiscal 1999, and that trend continued in fiscal 2000. As notedabove, sales softened again in fiscal 2001. We continue tobelieve that new technologies will generate significant industrygrowth during the current decade. However, we expect little, ifany, sales growth in fiscal 2002.

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Circuit City Group Management�s Discussion and Analysis of Results of Operations and Financial Condition

SALES BY MERCHANDISE CATEGORIES*

Fiscal 2001 2000 1999 1998 1997

Video........................... 35% 32% 31% 31% 32%Audio .......................... 16% 16% 17% 18% 19%Information

Technology........... 35% 33% 32% 30% 29%Entertainment............ 7% 5% 5% 6% 5%Appliances.................. 7% 14% 15% 15% 15%

Total ............................ 100% 100% 100% 100% 100%

* Circuit City updated its sales by merchandise category classifications in fis-cal 2001 to reflect the changes in the Company’s product selections in recentyears and expected changes going forward. Information for prior years hasbeen reclassified for consistency.

In most states, the Group sells extended warranty programson behalf of unrelated third parties who are the primary oblig-ors. Under these third-party warranty programs, we have nocontractual liability to the customer. In states where third-partywarranty sales are not permitted, the Group sells an extendedwarranty for which we are the primary obligor. Gross dollarsales from all extended warranty programs were 5.1 percent oftotal sales of the Circuit City business in fiscal 2001, comparedwith 5.4 percent in fiscal 2000 and fiscal 1999. Total extendedwarranty revenue, which is reported in total sales, was 4.0 per-cent of sales in fiscal 2001, 4.4 percent of sales in fiscal 2000and 4.6 percent of sales in fiscal 1999. The gross profit marginson products sold with extended warranties are higher than thegross profit margins on products sold without extended war-ranties. The fiscal 2001 decline in extended warranty sales as apercent of total sales reflects the increased selection of products,such as entertainment software, for which extended warrantiesare not available and reduced consumer demand for warrantieson many consumer electronics and home office products thathave experienced significant declines in average retails. Third-party extended warranty revenue was 3.9 percent of total salesin fiscal 2001 and 4.1 percent of total sales in fiscal 2000 andfiscal 1999.

SUPERSTORE SALES PER TOTAL SQUARE FOOT

Fiscal

2001.................................................................................................. $5282000 ................................................................................................. $5551999 ................................................................................................. $5141998 ................................................................................................. $4781997 ................................................................................................. $499

SUPERSTORE SALES PER TOTAL SQUARE FOOT. At the end of fiscal 2001, total space for all Circuit City Superstores equaled19,706,588 square feet and selling space equaled 11,469,092square feet. The fiscal 2001 sales per total square foot decreasereflects the decline in comparable store sales. The improvementsfrom fiscal 1998 through fiscal 2000 were driven by comparablestore sales growth in those years. The decline from fiscal 1997

to fiscal 1998 reflects the impact of larger-format stores, whichgenerate lower sales per square foot than smaller stores,declines in comparable store sales and declines in industrysales. The Group ceased construction of these larger stores afterfiscal 1999.

STORE MIX

Retail Units at Year-EndFiscal 2001 2000 1999 1998 1997

Superstores ...................... 594 571 537 500 443Circuit City Express........ 35 45 48 52 45Electronics-only.............. — — 2 4 5

Total.................................. 629 616 587 556 493

IMPACT OF INFLATION. Inflation has not been a significantcontributor to results. In fact, during the past three years, aver-age retail prices declined in virtually all of Circuit City’s prod-uct categories. Although product introductions could helpreverse this trend in selected areas, we expect no significantshort-term change overall. Because we purchase substantiallyall products sold in Circuit City stores in U.S. dollars, prices arenot directly impacted by the value of the dollar in relation toforeign currencies.

Cost of Sales, Buying and WarehousingThe gross profit margin was 23.6 percent of sales in fiscal 2001,24.7 percent of sales in fiscal 2000 and 24.4 percent of sales infiscal 1999. The fiscal 2001 gross profit margin was reduced byone-time costs of $28.3 million and merchandise markdowns of$28.0 million associated with the exit from the appliance business,significantly lower appliance gross margins prior to the announcedplans to exit that business and a merchandise mix that included ahigh percentage of traditional products that carry lower grossprofit margins. The one-time appliance exit costs included leaseterminations, employee severance, fixed asset impairment andother related costs. Excluding the appliance category, the grossprofit margin was 24.7 percent of sales in fiscal 2001, comparedwith 25.4 percent of sales in fiscal 2000 and 24.7 percent ofsales in fiscal 1999. Excluding the impact of the appliancemerchandise markdowns and the one-time appliance exit costs,the gross profit margin was 24.1 percent of sales in fiscal 2001.

GROSS PROFIT MARGIN COMPONENTS

Fiscal 2001 2000 1999

Circuit City store business..................... 24.1 % 24.7% 24.4%Impact of appliance markdowns........... (0.2)% — —One-time appliance exit costs............... (0.3)% — —

Gross profit margin ................................ 23.6 % 24.7% 24.4%

Gross profit margin excluding appliance category............................ 24.7 % 25.4% 24.7%

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The improvement in the gross profit margin from fiscal 1999to fiscal 2000 primarily reflected the higher percentage of salesfrom better-featured products and newer technologies, whichcarry higher gross profit margins, and continued improvementsin inventory management partly offset by the strength in per-sonal computer sales, which carry lower gross margins. In fiscal2001, the decline in the gross profit margin was limited bylower personal computer sales and by continued double-digitsales growth in new technologies and in higher margin cate-gories where selection was expanded as part of the exit fromthe appliance business. The impact of the appliance categoryand the high proportion of sales represented by traditionalproducts more than offset these factors.

Selling, General and Administrative ExpensesSelling, general and administrative expenses were 21.7 percent ofsales in fiscal 2001, compared with 19.6 percent of sales in fiscal2000 and 20.1 percent of sales in fiscal 1999. The fiscal 2001increase reflects the decline in comparable store sales, $41.9 mil-lion in remodeling costs for the Florida stores, $30.0 million incosts related to the partial remodels and $5.0 million in sever-ance costs associated with the fourth quarter workforce reduc-tion. Excluding these costs and the estimated sales disruptionduring the seven to 10 days of partial remodeling that occurredprimarily in the third quarter, the fiscal 2001 expense ratio wouldhave been 20.9 percent of sales. The improvement in the expenseratio from fiscal 1999 to fiscal 2000 primarily reflects leveragegained from the fiscal 2000 comparable store sales increase.

EXPENSE RATIO COMPONENTS

Fiscal 2001 2000 1999

Circuit City store business ........... 20.9% 19.6% 20.1%Florida remodel costs ................... 0.4% — —Partial remodel costs .................... 0.3% — —Sales disruption impact................ 0.1% — —

Expense ratio ................................. 21.7% 19.6% 20.1%

Interest ExpenseInterest expense was relatively unchanged as a percent of salesacross the three-year period at 0.1 percent of sales in fiscal 2001and fiscal 2000 and 0.2 percent of sales in fiscal 1999. Interestexpense was incurred on allocated debt used to fund store expan-sion, remodeling and working capital, including inventory.

Income TaxesThe Group’s effective income tax rate was 38.0 percent in fiscal2001 and fiscal 2000 and 38.1 percent in fiscal 1999.

Earnings from Continuing Operations Before Inter-Group Interestin the CarMax GroupEarnings from continuing operations before the Inter-GroupInterest in the CarMax Group were $115.2 million in fiscal 2001,compared with $326.7 million in fiscal 2000 and $235.0 millionin fiscal 1999. Excluding the estimated sales disruption duringthe seven to 10 days of partial remodeling, the appliance mer-chandise markdowns, exit costs, remodel expenses and severancecosts related to the workforce reduction, earnings from continu-ing operations before the Inter-Group Interest in the CarMaxGroup would have been $205.1 million in fiscal 2001.

Net Earnings (Loss) Related to Inter-Group Interest in the CarMax GroupThe net earnings attributed to the Circuit City Group’s Inter-GroupInterest in the CarMax Group were $34.0 million in fiscal 2001,compared with net earnings of $862,000 in fiscal 2000 and a netloss of $18.1 million in fiscal 1999.

Earnings from Continuing OperationsEarnings from continuing operations attributed to the CircuitCity Group were $149.2 million in fiscal 2001, $327.6 million infiscal 2000 and $216.9 million in fiscal 1999.

Loss from Discontinued OperationsOn June 16, 1999, Digital Video Express announced that it wouldcease marketing of the Divx home video system and discontinueoperations, but existing, registered customers would be able toview discs during a two-year phase-out period. The operatingresults of Divx and the loss on disposal of the Divx business havebeen segregated from continuing operations and reported as sep-arate line items, after tax, on the Circuit City Group statements ofearnings for the periods presented.

The loss from the discontinued operations of Divx totaled$16.2 million after an income tax benefit of $9.9 million in fis-cal 2000 and $68.5 million after an income tax benefit of $42.0million in fiscal 1999.

In fiscal 2000, the loss on the disposal of the Divx businesstotaled $114.0 million after an income tax benefit of $69.9 mil-lion. The loss on the disposal includes a provision for operatinglosses to be incurred during the phase-out period. It also includesprovisions for commitments under licensing agreements withmotion picture distributors, the write-down of assets to net real-izable value, lease termination costs, employee severance andbenefit costs and other contractual commitments.

Net EarningsNet earnings attributed to the Circuit City Group were $149.2million in fiscal 2001, $197.3 million in fiscal 2000 and $148.4million in fiscal 1999.

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Operations OutlookWe believe that increased household penetration of products andservices such as broadband Internet access, wireless communica-tions, multi-channel video programming devices, digital televi-sion and digital imaging will drive profitability of the consumerelectronics business during the current decade. For that reason,we are focused on store designs, sales counselor training, inven-tory management, marketing programs and Six Sigma processimprovements that will maintain Circuit City’s position as aleading retailer of new technologies.

Despite these plans and longer-term outlook, we recognizethat the sales pace shifted significantly throughout fiscal 2001and that sales were especially weak at the end of the fiscalyear. Therefore, we are cautious in our outlook for fiscal 2002.We expect to open 15 to 20 new Circuit City Superstores, relo-cate approximately 10 Superstores and fully remodel 20 to 25Superstores. We expect limited sales and earnings growth forthe Circuit City business in fiscal 2002. We do, however, expectcontinued strong sales and earnings growth for the CarMaxbusiness and anticipate that CarMax will make a greater contri-bution to the earnings attributed to the Circuit City Group infiscal 2002.

RECENT ACCOUNTING PRONOUNCEMENTSRefer to the “Management’s Discussion and Analysis of Resultsof Operations and Financial Condition” for Circuit City Stores,Inc. for a review of recent accounting pronouncements.

FINANCIAL CONDITIONIn fiscal 2001, net cash provided by operating activities of con-tinuing operations was $137.9 million, compared with $650.2million in fiscal 2000 and $399.4 million in fiscal 1999. The fis-cal 2001 decrease reflects the lower earnings from continuingoperations for the Circuit City business and a decrease inaccounts payable. The fiscal 2000 increase reflects a 39 percentincrease in earnings from continuing operations for the CircuitCity business and an increase in accounts payable, partly offsetby an increase in inventory.

Most financial activities, including the investment of surpluscash and the issuance and repayment of short-term and long-term debt, are managed by the Company on a centralized basis.Allocated debt of the Circuit City Group consists of (1) Companydebt, if any, that has been allocated in its entirety to the CircuitCity Group and (2) a portion of the Company’s debt that is allo-cated between the Groups. This pooled debt bears interest at arate based on the average pooled debt balance. Expenses relatedto increases in pooled debt are reflected in the weighted averageinterest rate of the pooled debt.

During fiscal 2001, a term loan totaling $175 million wasrepaid using the Company’s existing working capital. In addition,a term loan totaling $130 million and due in June 2001 was clas-sified as a current liability. Although the Company has the abilityto refinance this debt, we intend to repay it using existing work-ing capital. Payment of corporate debt does not necessarily resultin a reduction of Circuit City Group allocated debt.

The Circuit City Group's capital expenditures were $274.7million in fiscal 2001, $176.9 million in fiscal 2000 and $214.1million in fiscal 1999. The Group's capital expenditures in fiscal2001 primarily were related to Superstore remodeling and newCircuit City Superstore construction. In fiscal 2000 and fiscal1999, these expenditures primarily reflected new store construc-tion. Capital expenditures for the Circuit City Group have beenfunded through sale-leaseback transactions, landlord reimburse-ments and allocated short- and long-term debt. In fiscal 2002,the Group anticipates capital expenditures of approximately$215 million, primarily related to construction of new Superstores,the remodeling of 20 to 25 existing Superstores and the reloca-tion of approximately 10 Superstores. Sale-leasebacks, landlordreimbursement transactions and fixed asset sales totaled $100.2million in fiscal 2001, $74.8 million in fiscal 2000 and $134.3million in fiscal 1999.

Circuit City’s finance operation primarily funds its credit cardprograms through securitization transactions that allow the opera-tion to sell its receivables while retaining a small interest in them.The finance operation has a master trust securitization facilityfor its private-label credit card that allows the transfer of up to$1.31 billion in receivables through both private placement andthe public market. A second master trust securitization programallows for the transfer of up to $1.94 billion in receivablesrelated to the operation’s bankcard programs. Securitizedreceivables totaled $2.75 billion at February 28, 2001. Underthe securitization programs, receivables are sold to unaffiliatedthird parties with the servicing rights retained. We expect thatboth securitization programs can be expanded to accommodatefuture receivables growth.

At the end of fiscal 2001, the Circuit City Group retained a74.6 percent interest in the equity of the CarMax Group. As ofFebruary 28, 2001, the Circuit City Group’s equity in the CarMaxGroup was $292.2 million.

We believe that proceeds from sales of property and equipmentand receivables, future increases in the Company’s debt allocatedto the Circuit City Group and cash generated by operations willbe sufficient to fund the capital expenditures and operations ofthe Circuit City business.

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MARKET RISKThe Company manages the private-label and bankcard revolvingloan portfolios of the Circuit City finance operation. Portions ofthese portfolios are securitized and, therefore, are not presentedon the Group’s balance sheets. Interest rate exposure relating tothese receivables represents a market risk exposure that theCompany has managed with matched funding.

Interest rates charged on the managed private-label andbankcard portfolios are primarily indexed to the prime rate,adjustable on a monthly basis, with the balance at a fixedannual percentage rate. Total principal outstanding at February28, 2001, and February 29, 2000, had the following APR structure:

(Amounts in millions) 2001 2000

Indexed to prime rate.......................................... $2,596 $2,631Fixed APR.............................................................. 203 213

Total........................................................................ $2,799 $2,844

Financing for the securitization programs is achieved primar-ily through the issuance of public market debt, which is issued atfloating rates based on LIBOR. Receivables held by the Companyfor sale are financed with working capital. At February 28, 2001,and February 29, 2000, financings were as follows:

(Amounts in millions) 2001 2000

Floating-rate (including synthetic alteration) securitizations.............................. $2,754 $2,689

Fixed-rate securitizations.................................... — 137Held by the Company for sale ........................... 45 18

Total ....................................................................... $2,799 $2,844

The Company has analyzed its interest rate exposure and hasconcluded that it did not represent a material market risk atFebruary 28, 2001, or February 29, 2000. Because programs arein place to manage interest rate exposure relating to the con-sumer loan portfolios, the Company expects to experience rela-tively little impact as interest rates fluctuate. The Company alsohas the ability to adjust fixed-APR revolving cards and the indexon floating-rate cards, subject to cardholder ratification, butdoes not currently anticipate the need to do so.

FORWARD-LOOKING STATEMENTSCompany statements that are not historical facts, includingstatements about management’s expectations for fiscal year2002 and beyond, are forward-looking statements and involvevarious risks and uncertainties. Refer to the “Circuit City Stores,Inc. Management’s Discussion and Analysis of Results ofOperations and Financial Condition” for a review of possiblerisks and uncertainties.

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Circuit City Group Statements of Earnings

Years Ended February 28 or 29(Amounts in thousands) 2001 % 2000 % 1999 %

NET SALES AND OPERATING REVENUES......................................... $10,458,037 100.0 $10,599,406 100.0 $9,344,170 100.0Cost of sales, buying and warehousing................................... 7,964,148 76.1 7,977,214 75.3 7,060,198 75.6Appliance exit costs [NOTE 12] ...................................................... 28,326 0.3 — — — —

GROSS PROFIT............................................................................... 2,465,563 23.6 2,622,192 24.7 2,283,972 24.4

Selling, general and administrative expenses [NOTES 1 AND 9] ........................................................... 2,270,745 21.7 2,081,393 19.6 1,882,416 20.1

Appliance exit costs [NOTE 12] ...................................................... 1,670 — — — — —Interest expense [NOTES 1 AND 4] .................................................... 7,273 0.1 13,844 0.1 21,926 0.2

TOTAL EXPENSES............................................................................ 2,279,688 21.8 2,095,237 19.7 1,904,342 20.3

Earnings from continuing operations before income taxes and Inter-Group Interestin the CarMax Group ........................................................... 185,875 1.8 526,955 5.0 379,630 4.1

Provision for income taxes [NOTES 1 AND 5].................................. 70,637 0.7 200,243 1.9 144,646 1.6

EARNINGS FROM CONTINUING OPERATIONS BEFORE

INTER-GROUP INTEREST IN THE CARMAX GROUP.................... 115,238 1.1 326,712 3.1 234,984 2.5Net earnings (loss) related to Inter-Group Interest in

the CarMax Group [NOTES 1 AND 2]........................................... 34,009 0.3 862 0.0 (18,057) (0.2)

EARNINGS FROM CONTINUING OPERATIONS............................... 149,247 1.4 327,574 3.1 216,927 2.3

Discontinued operations [NOTE 13]:Loss from discontinued operations of Divx,

less income tax benefit................................................... – — (16,215) (0.1) (68,546) (0.7)Loss on disposal of Divx, less income tax benefit ........... – — (114,025) (1.1) — —

Loss from discontinued operations .......................................... – — (130,240) (1.2) (68,546) (0.7)

NET EARNINGS............................................................................... $ 149,247 1.4 $ 197,334 1.9 $ 148,381 1.6

See accompanying notes to Group financial statements.

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At February 28 or 29(Amounts in thousands) 2001 2000

ASSETS

CURRENT ASSETS:

Cash and cash equivalents..................................................................................................................... $ 437,329 $ 633,952Net accounts receivable [NOTE 10] ............................................................................................................. 451,099 464,023Merchandise inventory........................................................................................................................... 1,410,527 1,405,617Prepaid expenses and other current assets .......................................................................................... 55,317 13,353

TOTAL CURRENT ASSETS ............................................................................................................................ 2,354,272 2,516,945Property and equipment, net [NOTES 3 AND 4]............................................................................................ 796,789 753,325Inter-Group Interest in the CarMax Group [NOTE 2] .............................................................................. 292,179 257,535Other assets .............................................................................................................................................. 9,319 9,583

TOTAL ASSETS ............................................................................................................................................ $3,452,559 $3,537,388

LIABILITIES AND GROUP EQUITY

CURRENT LIABILITIES:

Current installments of long-term debt [NOTES 4 AND 8] .......................................................................... $ 24,237 $ 85,735Accounts payable .................................................................................................................................... 820,077 884,172Short-term debt [NOTE 4]............................................................................................................................ 213 1,453Accrued expenses and other current liabilities ................................................................................... 146,818 184,705Deferred income taxes [NOTE 5]................................................................................................................. 74,317 53,971

TOTAL CURRENT LIABILITIES ...................................................................................................................... 1,065,662 1,210,036Long-term debt, excluding current installments [NOTES 4 AND 8] ........................................................... 33,080 127,984Deferred revenue and other liabilities .................................................................................................. 85,329 122,771Deferred income taxes [NOTE 5]................................................................................................................. 11,329 21,877

TOTAL LIABILITIES ...................................................................................................................................... 1,195,400 1,482,668GROUP EQUITY.......................................................................................................................................... 2,257,159 2,054,720

Commitments and contingent liabilities [NOTES 1, 7, 8, 10, 11, 12, AND 13]

TOTAL LIABILITIES AND GROUP EQUITY..................................................................................................... $3,452,559 $3,537,388

See accompanying notes to Group financial statements.

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Circuit City Group Balance Sheets

Circuit City Group Statements of Cash Flows

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

OPERATING ACTIVITIES:

Net earnings.......................................................................................................... $ 149,247 $ 197,334 $ 148,381Adjustments to reconcile net earnings to net cash provided by

operating activities of continuing operations:Loss from discontinued operations [NOTE 13].................................................. – 16,215 68,546Loss on disposal of discontinued operations [NOTE 13] ................................. – 114,025 —Net (earnings) loss related to Inter-Group Interest in

the CarMax Group .................................................................................... (34,009) (862) 18,057Depreciation and amortization ..................................................................... 126,297 132,923 119,724Loss (gain) on sales of property and equipment ........................................ 4,259 (418) 3,087Provision for deferred income taxes ............................................................ 11,007 41,828 5,951Decrease in deferred revenue and other liabilities ..................................... (17,442) (17,799) (32,771)Decrease in net accounts receivable ............................................................ 12,950 12,967 60,138Increase in merchandise inventory .............................................................. (4,910) (144,598) (16,107)(Increase) decrease in prepaid expenses and other current assets .............. (41,964) 83,540 5,543Decrease (increase) in other assets ............................................................... 588 (1,015) 202(Decrease) increase in accounts payable, accrued expenses

and other current liabilities ..................................................................... (68,074) 216,043 18,609

NET CASH PROVIDED BY OPERATING ACTIVITIES

OF CONTINUING OPERATIONS.......................................................................... 137,949 650,183 399,360

INVESTING ACTIVITIES:

Purchases of property and equipment............................................................... (274,722) (176,873) (214,085)Proceeds from sales of property and equipment.............................................. 100,189 74,811 134,315

NET CASH USED IN INVESTING ACTIVITIES

OF CONTINUING OPERATIONS.......................................................................... (174,533) (102,062) (79,770)

FINANCING ACTIVITIES:

Decrease in allocated short-term debt, net ....................................................... (1,240) (1,958) (2,180)Decrease in allocated long-term debt, net ........................................................ (156,402) (74,603) (109,885)Equity issuances, net ........................................................................................... 38,123 18,591 34,301Dividends paid...................................................................................................... (14,346) (14,207) (13,981)

NET CASH USED IN FINANCING ACTIVITIES

OF CONTINUING OPERATIONS.......................................................................... (133,865) (72,177) (91,745)

CASH USED IN DISCONTINUED OPERATIONS [NOTE 13]................................................ (26,174) (90,193) (69,844)

(Decrease) increase in cash and cash equivalents ................................................. (196,623) 385,751 158,001Cash and cash equivalents at beginning of year................................................... 633,952 248,201 90,200

Cash and cash equivalents at end of year.............................................................. $ 437,329 $ 633,952 $ 248,201

See accompanying notes to Group financial statements.

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(Amounts in thousands)

BALANCE AT MARCH 1, 1998................................................................................................................................................................... $ 1,648,332Net earnings..................................................................................................................................................................................... 148,381Equity issuances, net ...................................................................................................................................................................... 42,165Cash dividends................................................................................................................................................................................. (13,981)Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................ 576

BALANCE AT FEBRUARY 28, 1999............................................................................................................................................................. 1,825,473Net earnings..................................................................................................................................................................................... 197,334Equity issuances, net ...................................................................................................................................................................... 50,205Cash dividends................................................................................................................................................................................. (14,207)Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................ (4,085)

BALANCE AT FEBRUARY 29, 2000............................................................................................................................................................. 2,054,720Net earnings..................................................................................................................................................................................... 149,247Equity issuances, net ...................................................................................................................................................................... 66,903Cash dividends................................................................................................................................................................................. (14,346)Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................ 635

BALANCE AT FEBRUARY 28, 2001............................................................................................................................................................. $2,257,159

See accompanying notes to Group financial statements.

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Circuit City Group Statements of Group Equity

Notes to Circuit City Group Financial Statements

1. BASIS OF PRESENTATIONThe common stock of Circuit City Stores, Inc. consists of twocommon stock series, which are intended to reflect the perfor-mance of the Company's two businesses. The Circuit City GroupCommon Stock is intended to track the performance of theCircuit City store-related operations, the Group’s retained interestin the CarMax Group and the Company’s investment in DigitalVideo Express, which has been discontinued (see Note 13). Theeffects of this retained interest on the Circuit City Group’s finan-cial statements are identified by the term “Inter-Group.” TheCarMax Group Common Stock is intended to track the perfor-mance of the CarMax Group's operations. The Inter-GroupInterest is not considered outstanding CarMax Group CommonStock. Therefore, any net earnings or loss attributed to the Inter-Group Interest is not included in the CarMax Group’s per sharecalculations. The Circuit City Group held a 74.6 percent interestin the CarMax Group at February 28, 2001, a 74.7 percent inter-est at February 29, 2000, and a 76.6 percent interest at February28, 1999. The terms of each series of common stock are dis-cussed in detail in the Company's Form 8-A registration state-ment on file with the SEC.

Notwithstanding the attribution of the Company’s assets andliabilities, including contingent liabilities, and stockholders’ equitybetween the Circuit City Group and the CarMax Group for thepurposes of preparing the financial statements, holders of CircuitCity Group Common Stock and holders of CarMax GroupCommon Stock are shareholders of the Company and continue tobe subject to all of the risks associated with an investment in theCompany and all of its businesses, assets and liabilities. Suchattribution and the equity structure of the Company do not affecttitle to the assets or responsibility for the liabilities of theCompany or any of its subsidiaries. The results of operations orfinancial condition of one Group could affect the results of opera-tions or financial condition of the other Group. Net losses of eitherGroup, and dividends or distributions on, or repurchases of,Circuit City Group Common Stock or CarMax Group CommonStock will reduce funds legally available for dividends on, orrepurchases of, both stocks. Accordingly, the Circuit City Groupfinancial statements included herein should be read in conjunctionwith the Company’s consolidated financial statements, the CarMaxGroup financial statements and the Company's SEC filings.

The Circuit City Group’s financial statements reflect the appli-cation of the management and allocation policies adopted by theboard of directors. These policies may be modified or rescinded,or new policies may be adopted, at the sole discretion of theboard of directors, although the board of directors has no pre-sent plans to do so. These management and allocation policiesinclude the following:

(A) FINANCIAL ACTIVITIES: Most financial activities are managedby the Company on a centralized basis. Such financial activitiesinclude the investment of surplus cash and the issuance andrepayment of short-term and long-term debt. Allocated investedsurplus cash of the Circuit City Group consists of (i) Companycash equivalents, if any, that have been allocated in their entiretyto the Circuit City Group and (ii) a portion of the Company’s cash

equivalents, if any, that are allocated between the Groups.Allocated debt of the Circuit City Group consists of (i) Companydebt, if any, that has been allocated in its entirety to the CircuitCity Group and (ii) a portion of the Company’s pooled debt,which is debt allocated between the Groups. The pooled debtbears interest at a rate based on the average pooled debt balance.Expenses related to increases in pooled debt are reflected in theweighted average interest rate of such pooled debt.

(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporategeneral and administrative costs and other shared services gener-ally have been allocated to the Circuit City Group based upon uti-lization of such services by the Group. Where determinations basedon utilization alone have been impractical, other methods and cri-teria are used that management believes are equitable and providea reasonable estimate of the costs attributable to the Group.

(C) INCOME TAXES: The Circuit City Group is included in theconsolidated federal income tax return and certain state taxreturns filed by the Company. Accordingly, the financial state-ment provision and the related tax payments or refunds arereflected in each Group’s financial statements in accordance withthe Company’s tax allocation policy for such Groups. In general,this policy provides that the consolidated tax provision andrelated tax payments or refunds are allocated between theGroups based principally upon the financial income, taxableincome, credits and other amounts directly related to eachGroup. Tax benefits that cannot be used by the Group generatingsuch attributes, but can be utilized on a consolidated basis, areallocated to the Group that generated such benefits. As a result,the allocated Group amounts of taxes payable or refundable arenot necessarily comparable to those that would have resulted ifthe Groups had filed separate tax returns.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(A) CASH AND CASH EQUIVALENTS: Cash equivalents of

$408,778,000 at February 28, 2001, and $581,736,000 atFebruary 29, 2000, consist of highly liquid debt securities withoriginal maturities of three months or less.

(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For trans-fers of financial assets that qualify as sales, the Company mayretain interest-only strips, one or more subordinated tranches,residual interests in a securitization trust, servicing rights and acash reserve account, all of which are retained interests in thesecuritized receivables. These retained interests are measuredbased on the fair value at the date of transfer. The Companydetermines fair value based on the present value of futureexpected cash flows using management’s best estimates of thekey assumptions such as finance charge income, default rates,payment rates, forward yield curves and discount rates appropri-ate for the type of asset and risk. Retained interests are includedin net accounts receivable and are carried at fair value withchanges in fair value reflected in earnings.

(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Companyenters into financial instruments on behalf of the Circuit CityGroup. The carrying value of the Company's financial instru-ments, excluding interest rate swaps held for hedging purposes,

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approximates fair value. Credit risk is the exposure created bythe potential nonperformance of another material party to anagreement because of changes in economic, industry or geo-graphic factors. The Company mitigates credit risk by dealingonly with counterparties that are highly rated by several finan-cial rating agencies. Accordingly, the Company does not antici-pate material loss for nonperformance. The Company broadlydiversifies all financial instruments along industry, product andgeographic areas.

(D) MERCHANDISE INVENTORY: Inventory is stated at the lowerof cost or market. Cost is determined by the average cost method.

(E) PROPERTY AND EQUIPMENT: Property and equipment isstated at cost less accumulated depreciation and amortization.Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives.

Property held under capital lease is stated at the lower of thepresent value of the minimum lease payments at the inception ofthe lease or market value and is amortized on a straight-linebasis over the lease term or the estimated useful life of the asset,whichever is shorter.

(F) COMPUTER SOFTWARE COSTS: The Company accounts forcomputer software costs in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position98-1, “Accounting for the Costs of Computer Software Developedor Obtained for Internal Use.” Once the capitalization criteria ofSOP 98-1 have been met, external direct costs of materials andservices used in the development of internal-use software andpayroll and payroll-related costs for employees directly involvedin the development of internal-use software are capitalized.Amounts capitalized are amortized on a straight-line basis overa period of three to five years.

(G) PRE-OPENING EXPENSES: Effective March 1, 1999, theCompany adopted SOP 98-5, “Reporting on the Costs of Start-UpActivities.” SOP 98-5 requires costs of start-up activities, includ-ing organization and pre-opening costs, to be expensed asincurred. Prior to fiscal 2000, the Company capitalized pre-openingcosts for new store locations. Beginning in the month after thestore opened for business, the pre-opening costs were amortizedover the remainder of the fiscal year.

(H) INCOME TAXES: Income taxes are accounted for in accor-dance with SFAS No. 109, “Accounting for Income Taxes.”Deferred income taxes reflect the impact of temporary differ-ences between the amounts of assets and liabilities recognizedfor financial reporting purposes and the amounts recognized forincome tax purposes, measured by applying currently enactedtax laws. A deferred tax asset is recognized if it is more likelythan not that a benefit will be realized.

(I) REVENUE RECOGNITION: The Circuit City Group recognizesrevenue when the earnings process is complete, generally at eitherthe time of sale to a customer or upon delivery to a customer.

(J) DEFERRED REVENUE: The Circuit City Group sells its ownextended warranty contracts and extended warranty contracts onbehalf of unrelated third parties. The contracts extend beyond thenormal manufacturer’s warranty period, usually with terms(including the manufacturer’s warranty period) between 12 and

60 months. Commission revenue for the unrelated third-partyextended warranty plans is recognized at the time of sale becausethe third parties are the primary obligors under these contracts.Inasmuch as Circuit City is the primary obligor on its own contracts, all revenue from the sale of these contracts is deferredand amortized on a straight-line basis over the life of the contracts.Incremental direct costs related to the sale of contracts are deferredand charged to expense in proportion to the revenue recognized.

(K) INTER-GROUP INTEREST: The Circuit City Group held a 74.6percent Inter-Group Interest in the CarMax Group at February 28,2001, a 74.7 percent Inter-Group Interest at February 29, 2000,and a 76.6 percent Inter-Group Interest at February 28, 1999. Forpurposes of the Circuit City Group financial statements, the CircuitCity Group accounts for the Inter-Group Interest in a manner sim-ilar to the equity method of accounting. Accordingly, the CircuitCity Group’s Inter-Group Interest in the Company’s equity valuethat is attributed to the CarMax Group is reflected as “Inter-GroupInterest in the CarMax Group” on the Circuit City Group balancesheets. Similarly, the net earnings (loss) of the CarMax Groupattributed to the Circuit City Group’s Inter-Group Interest arereflected as “Net earnings (loss) related to Inter-Group Interest inthe CarMax Group” on the Circuit City Group statements of earn-ings. All amounts corresponding to the Circuit City Group’s Inter-Group Interest in the CarMax Group in these Group financialstatements represent the Circuit City Group’s proportional interestin the businesses, assets and liabilities and income and expensesof the CarMax Group.

The carrying value of the Circuit City Group’s Inter-GroupInterest in the CarMax Group has been adjusted proportionallyfor the net earnings (loss) of the CarMax Group. In addition, inthe event of any dividend or other distribution on CarMax GroupCommon Stock, an amount that is proportionate to the aggre-gate amount paid in respect to shares of CarMax Group CommonStock would be transferred to the Circuit City Group from theCarMax Group with respect to its Inter-Group Interest and wouldreduce the related book value.

(L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operatingprofits generated by the finance operation are recorded as areduction to selling, general and administrative expenses.

(M) ADVERTISING EXPENSES: All advertising costs are expensedas incurred.

(N) STOCK-BASED COMPENSATION: The Company accounts forstock-based compensation in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and provides the pro forma disclosures of SFAS No.123, “Accounting for Stock-Based Compensation.”

(O) RISKS AND UNCERTAINTIES: The Circuit City Group is aleading national retailer of brand-name consumer electronics,personal computers and entertainment software. The diversityof the Circuit City Group's products, customers, suppliers andgeographic operations reduces the risk that a severe impact willoccur in the near term as a result of changes in its customerbase, competition, sources of supply or markets. It is unlikelythat any one event would have a severe impact on the CircuitCity Group's operating results.

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Because of the Inter-Group Interest, the Circuit City Groupalso is subject to risks and uncertainties related to the CarMaxGroup. The CarMax Group is a used- and new-car retail busi-ness. The diversity of the CarMax Group’s customers and suppli-ers reduces the risk that a severe impact will occur in the nearterm as a result of changes in its customer base, competition orsources of supply. However, because of the CarMax Group’s lim-ited overall size, management cannot assure that unanticipatedevents will not have a negative impact on the Circuit City Group.

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica requires management to make estimates and assump-tions that affect the reported amounts of assets, liabilities, rev-enues and expenses and the disclosure of contingent assets andliabilities. Actual results could differ from those estimates.

(P) RECLASSIFICATIONS: Certain amounts in prior years have beenreclassified to conform to classifications adopted in fiscal 2001.

3. PROPERTY AND EQUIPMENTProperty and equipment, at cost, at February 28 or 29 is summa-rized as follows:

(Amounts in thousands) 2001 2000

Land and buildings (20 to 25 years)............ $ 76,660 $ 98,537Land held for sale........................................... 2,759 —Construction in progress ............................... 44,335 51,378Furniture, fixtures and equipment

(3 to 8 years).............................................. 809,501 690,512Leasehold improvements

(10 to 15 years)........................................... 598,586 566,103Capital leases, primarily buildings

(20 years).................................................... 12,471 12,471

1,544,312 1,419,001Less accumulated depreciation and

amortization............................................... 747,523 665,676

Property and equipment, net........................ $ 796,789 $ 753,325

4. DEBTLong-term debt of the Company at February 28 or 29 is summa-rized as follows:

(Amounts in thousands) 2001 2000

Term loans.......................................................... $230,000 $405,000Industrial Development Revenue Bonds due

through 2006 at various prime-based rates of interest ranging from 5.5% to 6.7%...... 4,400 5,419

Obligations under capital leases [NOTE 8]......... 12,049 12,416Note payable ...................................................... 2,076 3,750

Total long-term debt......................................... 248,525 426,585Less current installments.................................. 132,388 177,344

Long-term debt, excluding current installments .................................................. 116,137 249,241

Portion of long-term debt allocatedto the Circuit City Group............................ $ 57,317 $213,719

In July 1994, the Company entered into a seven-year,$100,000,000 unsecured bank term loan. The loan was restruc-tured in August 1996 as a $100,000,000, six-year unsecuredbank term loan. Principal is due in full at maturity with interestpayable periodically at LIBOR plus 0.40 percent. At February 28,2001, the interest rate on the term loan was 5.97 percent.

In May 1995, the Company entered into a five-year,$175,000,000 unsecured bank term loan. As scheduled, theCompany used existing working capital to repay this term loanin May 2000.

In June 1996, the Company entered into a five-year,$130,000,000 unsecured bank term loan. Principal is due in fullat maturity with interest payable periodically at LIBOR plus 0.35percent. At February 28, 2001, the interest rate on the term loanwas 5.73 percent. This term loan is due in June 2001 and wasclassified as a current liability at February 28, 2001. Althoughthe Company has the ability to refinance this loan, it intends torepay the debt using existing working capital.

The Company maintains a multi-year, $150,000,000 unsecuredrevolving credit agreement with four banks. The agreement callsfor interest based on both committed rates and money marketrates and a commitment fee of 0.18 percent per annum. Theagreement was entered into as of August 31, 1996, and terminatesAugust 31, 2002. No amounts were outstanding under the revolv-ing credit agreement at February 28, 2001, or February 29, 2000.

The Industrial Development Revenue Bonds are collateralizedby land, buildings and equipment with an aggregate carryingvalue of approximately $6,243,000 at February 28, 2001, and$8,404,000 at February 29, 2000.

Under certain of the debt agreements, the Company mustmeet financial covenants relating to minimum tangible networth, current ratios and debt-to-capital ratios. The Companywas in compliance with all such covenants at February 28, 2001,and February 29, 2000.

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Short-term debt of the Company is funded through committedlines of credit and informal credit arrangements, as well as therevolving credit agreement. Amounts outstanding and committedlines of credit available are as follows:

Years EndedFebruary 28 or 29

(Amounts in thousands) 2001 2000

Average short-term debt outstanding .......... $ 56,065 $ 44,692Maximum short-term debt outstanding....... $365,275 $411,791Aggregate committed lines of credit ............ $360,000 $370,000

The weighted average interest rate on the outstanding short-term debt was 6.8 percent during fiscal 2001, 5.6 percent duringfiscal 2000 and 5.1 percent during fiscal 1999.

Interest expense allocated by the Company to the Circuit CityGroup, excluding interest capitalized, was $7,273,000 in fiscal2001, $13,844,000 in fiscal 2000 and $21,926,000 in fiscal 1999.The Circuit City Group capitalizes interest in connection with theconstruction of certain facilities and the development or purchaseof software for internal use. Interest capitalized amounted to$2,121,000 in fiscal 2001, $2,166,000 in fiscal 2000 and$2,749,000 in fiscal 1999.

5. INCOME TAXESThe components of the provision for income taxes on earningsfrom continuing operations before the Inter-Group Interest in theCarMax Group are as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Current:Federal...................................... $52,846 $141,514 $123,001State.......................................... 7,993 16,901 15,694

60,839 158,415 138,695

Deferred:Federal...................................... 9,505 40,572 5,773State.......................................... 293 1,256 178

9,798 41,828 5,951

Provision for income taxes......... $70,637 $200,243 $144,646

The effective income tax rate differed from the federal statutoryincome tax rate as follows:

Years Ended February 28 or 292001 2000 1999

Federal statutory income tax rate........ 35.0% 35.0% 35.0%State and local income taxes,

net of federal benefit........................ 3.0% 3.0% 3.1%

Effective income tax rate ...................... 38.0% 38.0% 38.1%

In accordance with SFAS No. 109, the tax effects of temporarydifferences that give rise to a significant portion of the deferredtax assets and liabilities at February 28 or 29 are as follows:

(Amounts in thousands) 2001 2000

Deferred tax assets:Inventory ...................................................... $ — $ 7,264Accrued expenses ........................................ 42,953 27,974Other .............................................................. 7,311 7,167

Total gross deferred tax assets............. 50,264 42,405

Deferred tax liabilities:Depreciation and amortization.................. 42,488 44,854Deferred revenue ......................................... 32,825 29,656Securitized receivables................................ 36,257 14,069Inventory ...................................................... 9,927 —Prepaid expenses ......................................... 10,788 23,023Other .............................................................. 3,625 6,651

Total gross deferred tax liabilities....... 135,910 118,253

Net deferred tax liability.................................. $ 85,646 $ 75,848

Based on the Company’s historical and current pretax earn-ings, management believes the amount of gross deferred taxassets will more likely than not be realized through future tax-able income; therefore, no valuation allowance is necessary.

6. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS(A) 401(k) PLAN: Effective August 1, 1999, the Company began

sponsoring a 401(k) Plan for all employees meeting certain eligi-bility criteria. Under the Plan, eligible employees can contributeup to 15 percent of their salaries, and the Company matches aportion of those associate contributions. The Company's expensefor this plan for Circuit City Group associates was $3,996,000 infiscal 2001 and $2,158,000 in fiscal 2000.

(B) PREFERRED STOCK: In conjunction with the Company’sShareholders Rights Plan as amended and restated, preferredstock purchase rights were distributed as a dividend at the rateof one right for each share of Circuit City Group CommonStock. The rights are exercisable only upon the attainment of, orthe commencement of a tender offer to attain, a specified own-ership interest in the Company by a person or group. Whenexercisable, each Circuit City Group right would entitle share-holders to buy one eight-hundredth of a share of CumulativeParticipating Preferred Stock, Series E, $20 par value, at anexercise price of $125 per share subject to adjustment. A totalof 500,000 shares of such preferred stock, which have preferen-tial dividend and liquidation rights, have been designated. Nosuch shares are outstanding. In the event that an acquiring per-son or group acquires the specified ownership percentage of theCompany’s common stock (except pursuant to a cash tenderoffer for all outstanding shares determined to be fair by theboard of directors) or engages in certain transactions with theCompany after the rights become exercisable, each right will beconverted into a right to purchase, for half the current marketprice at that time, shares of the related Group stock valued at

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two times the exercise price. The Company also has 1,000,000shares of undesignated preferred stock authorized of which noshares are outstanding and an additional 500,000 shares of pre-ferred stock designated as Series F, which are related to similarrights held by CarMax Group shareholders.

(C) VOTING RIGHTS: The holders of both series of commonstock and any series of preferred stock outstanding and entitledto vote together with the holders of common stock will votetogether as a single voting group on all matters on which com-mon shareholders generally are entitled to vote other than amatter on which the common stock or either series thereof orany series of preferred stock would be entitled to vote as a sepa-rate voting group. On all matters on which both series of com-mon stock would vote together as a single voting group, (i) eachoutstanding share of Circuit City Group Common Stock shallhave one vote and (ii) each outstanding share of CarMax GroupCommon Stock shall have a number of votes based on theweighted average ratio of the market value of a share ofCarMax Group Common Stock to a share of Circuit City GroupCommon Stock. If shares of only one series of common stockare outstanding, each share of that series shall be entitled toone vote. If either series of common stock is entitled to vote asa separate voting group with respect to any matter, each shareof that series shall, for purposes of such vote, be entitled to onevote on such matter.

(D) RESTRICTED STOCK: The Company has issued restrictedstock under the provisions of the 1994 Stock Incentive Planwhereby management and key employees are granted restrictedshares of Circuit City Group Common Stock. Shares areawarded in the name of the employee, who has all the rights ofa shareholder, subject to certain restrictions or forfeitures.Restrictions on the awards generally expire three to seven yearsfrom the date of grant. Total restricted stock awards of1,483,358 shares of Circuit City Group Common Stock weregranted to eligible employees in fiscal 2001. Approximately1,047,000 of those shares were granted as a one-for-onereplacement for cancelled options that were originally grantedon June 13, 2000. Options held by senior management wereexcluded from this replacement grant. Approximately 782,000of those shares vest two-and-one-half years from the date of

grant and approximately 265,000 shares vest four to five yearsfrom the grant date with accelerated vesting if certain perfor-mance factors are met. The market value at the date of grant ofall shares granted has been recorded as unearned compensationand is a component of stockholders’ equity. Unearned compen-sation is expensed over the restriction periods. In fiscal 2001, atotal of $11,211,200 was charged to operations ($11,648,700 infiscal 2000 and $8,741,100 in fiscal 1999). As of February 28,2001, 2,364,051 restricted shares of Circuit City Group CommonStock were outstanding.

(E) EMPLOYEE STOCK PURCHASE PLANS: The Company hasEmployee Stock Purchase Plans for all employees meeting certain eligibility criteria. Under the Circuit City Group Plan,eligible employees may purchase shares of Circuit City GroupCommon Stock, subject to certain limitations. For each $1.00contributed by employees under the Plan, the Company matches$0.15. Purchases are limited to 10 percent of an employee’s eligible compensation, up to a maximum of $7,500 per year. At February 28, 2001, a total of 2,501,731 shares remainedavailable under the Circuit City Group Plan. During fiscal 2001,862,315 shares were issued to or purchased on the open marketfor employees (501,984 shares in fiscal 2000 and 858,710 sharesin fiscal 1999). The average price per share purchased under thePlan was $29.93 in fiscal 2001, $41.70 in fiscal 2000 and $21.69in fiscal 1999. The Company match or purchase price discountfor the Circuit City Group totaled $2,519,500 in fiscal 2001,$2,682,300 in fiscal 2000 and $2,716,400 in fiscal 1999.

(F) STOCK INCENTIVE PLANS: Under the Company’s stockincentive plans, nonqualified stock options may be granted tomanagement, key employees and outside directors to purchaseshares of Circuit City Group Common Stock. The exercise pricefor nonqualified options is equal to, or greater than, the marketvalue at the date of grant. Options generally are exercisableover a period of one to 10 years from the date of grant.

A summary of the status of the Circuit City Group’s stockoptions and changes during the years ended February 28, 2001,February 29, 2000, and February 28, 1999, are shown in Table 1.Table 2 summarizes information about stock options outstandingas of February 28, 2001.

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The Circuit City Group applies APB Opinion No. 25 andrelated interpretations in accounting for its stock option plans.Accordingly, no compensation cost has been recognized. Hadcompensation cost been determined based on the fair value atthe grant date consistent with the methods of SFAS No. 123, thenet earnings attributed to the Circuit City Group would havechanged to the pro forma amounts indicated in the followingtable. In accordance with the transition provisions of SFAS No.123, the pro forma amounts reflect options with grant datessubsequent to March 1, 1995. Therefore, the full impact of cal-culating compensation cost for stock options under SFAS No.123 is not reflected in the pro forma net earnings amounts pre-sented because compensation cost is reflected over the options’vesting periods and compensation cost of options granted priorto March 1, 1995, is not considered. The pro forma effect on fis-cal year 2001 may not be representative of the pro forma effectson net earnings for future years.

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Earnings from continuing operations:As reported ............................ $149,247 $327,574 $216,927Pro forma............................... 136,957 319,337 211,025

Net earnings:As reported ............................ $149,247 $197,334 $148,381Pro forma............................... 136,957 189,097 142,479

For the purpose of computing the pro forma amounts, the fairvalue of each option on the date of grant is estimated using theBlack-Scholes option-pricing model. The weighted averageassumptions used in the model are as follows:

2001 2000 1999

Expected dividend yield.................. 0.2% 0.2% 0.4%Expected stock volatility................. 49% 38% 33%Risk-free interest rates..................... 6% 6% 6%Expected lives (in years)................. 5 5 5

Using these assumptions in the Black-Scholes model, theweighted average fair value of options granted for the CircuitCity Group is $17 in fiscal 2001, $17 in fiscal 2000 and $8 infiscal 1999.

7. PENSION PLANSThe Company has a noncontributory defined benefit pensionplan covering the majority of full-time employees who are atleast age 21 and have completed one year of service. The cost ofthe program is being funded currently. Plan benefits generallyare based on years of service and average compensation. Planassets consist primarily of equity securities and included 160,000shares of Circuit City Group Common Stock at February 28,2001, and February 29, 2000. Eligible employees of the CircuitCity Group participate in the Company’s plan. Pension costs forthese employees have been allocated to the Circuit City Groupbased on its proportionate share of the projected benefit obligation.

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TABLE 1 2001 2000 1999

Weighted Average Weighted Average Weighted Average(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price

Outstanding at beginning of year................ 7,380 $25.07 8,894 $18.25 9,988 $16.00Granted........................................................... 4,280 34.80 1,564 40.75 1,080 21.17Exercised.......................................................... (1,526) 23.64 (2,864) 12.65 (2,008) 8.77Cancelled.......................................................... (1,414) 34.25 (214) 22.06 (166) 16.80

Outstanding at end of year........................... 8,720 $28.60 7,380 $25.07 8,894 $18.25

Options exercisable at end of year .............. 3,158 $21.86 1,258 $13.89 2,966 $12.02

TABLE 2 Options Outstanding Options Exercisable

Weighted Average(Shares in thousands) Number Remaining Weighted Average Number Weighted AverageRange of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price

$ 9.09 to 14.75 ............................................. 1,344 3.8 $14.10 879 $13.9315.18 to 18.00............................................. 1,067 3.0 17.24 876 17.2318.43 to 25.28............................................. 864 4.1 21.11 212 20.7829.50............................................................. 1,000 1.1 29.50 1,000 29.5034.84 to 35.21 ............................................. 3,038 7.2 35.21 — —35.22 to 47.53............................................. 1,407 5.4 40.72 191 40.81

Total ................................................................ 8,720 4.9 $28.60 3,158 $21.86

The following tables set forth the Circuit City Group’s shareof the Pension Plan’s financial status and amounts recognized inthe balance sheets as of February 28 or 29:

(Amounts in thousands) 2001 2000

Change in benefit obligation:Benefit obligation at beginning of year.... $109,337 $110,001Service cost .................................................... 12,617 13,428Interest cost.................................................... 8,690 7,384Actuarial loss (gain)...................................... 20,262 (17,325)Benefits paid .................................................. (2,994) (4,151)

Benefit obligation at end of year ............... $147,912 $109,337

Change in plan assets:Fair value of plan assets at beginning

of year....................................................... $129,638 $ 94,125Actual return on plan assets ....................... (10,396) 28,166Employer contributions ............................... 14,103 11,498Benefits paid .................................................. (2,994) (4,151)

Fair value of plan assets at end of year .... $130,351 $129,638

Reconciliation of funded status:Funded status ................................................ $ (17,561) $ 20,301Unrecognized actuarial loss (gain) ............. 13,922 (27,924)Unrecognized transition asset..................... (199) (398)Unrecognized prior service benefit ............ (281) (421)

Net amount recognized................................ $ (4,119) $ (8,442)

The components of net pension expense are as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Service cost ......................................... $12,617 $13,428 $10,479Interest cost......................................... 8,690 7,384 6,135Expected return on plan assets ........ (10,914) (8,919) (7,675)Amortization of prior service cost.... (140) (132) (104)Amortization of transitional asset.... (199) (199) (199)Recognized actuarial (gain) loss....... (274) 10 –

Net pension expense ......................... $ 9,780 $11,572 $ 8,636

Assumptions used in the accounting for the Pension Plan were:

Years Ended February 28 or 292001 2000 1999

Weighted average discount rate ................. 7.5% 8.0% 6.8%Rate of increase in compensation levels..... 6.0% 6.0% 5.0%Expected rate of return on plan assets....... 9.0% 9.0% 9.0%

The Company also has an unfunded nonqualified plan thatrestores retirement benefits for certain senior executives who areaffected by Internal Revenue Code limitations on benefits pro-vided under the Company's Pension Plan. The projected benefitobligation under this plan and allocated to the Circuit CityGroup was $9.9 million at February 28, 2001, and $6.3 millionat February 29, 2000.

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8. LEASE COMMITMENTSThe Circuit City Group conducts a substantial portion of its busi-ness in leased premises. The Circuit City Group’s lease obliga-tions are based upon contractual minimum rates. For certainlocations, amounts in excess of these minimum rates are payablebased upon specified percentages of sales. Rental expense andsublease income for all operating leases are summarized as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Minimum rentals ...................... $305,177 $288,037 $273,185Rentals based on sales

volume.................................. 1,229 1,327 1,247Sublease income ....................... (15,242) (16,425) (14,857)

Net rental expense.................... $291,164 $272,939 $259,575

The Circuit City Group computes rent based on a percentageof sales volumes in excess of defined amounts in certain storelocations. Most of the Circuit City Group’s other leases are fixed-dollar rental commitments, with many containing rent escalationsbased on the Consumer Price Index. Most provide that the CircuitCity Group pay taxes, maintenance, insurance and operatingexpenses applicable to the premises.

The initial term of most real property leases will expire withinthe next 20 years; however, most of the leases have options pro-viding for additional lease terms of five to 25 years at termssimilar to the initial terms.

Future minimum fixed lease obligations, excluding taxes,insurance and other costs payable directly by the Circuit CityGroup, as of February 28, 2001, were:

Operating Operating(Amounts in thousands) Capital Lease SubleaseFiscal Leases Commitments Income

2002.................................................. $ 1,725 $ 293,829 $(13,350)2003.................................................. 1,726 290,899 (12,638)2004.................................................. 1,768 288,436 (11,142)2005.................................................. 1,798 286,700 (10,193)2006.................................................. 1,807 284,673 (9,132)After 2006........................................ 12,859 2,828,888 (34,437)

Total minimum lease payments..... 21,683 $4,273,425 $(90,892)

Less amounts representing interest ......................................... (9,634)

Present value of net minimum capital lease payments [NOTE 4].... $12,049

In fiscal 2001, the Company entered into sale-leasebacktransactions with unrelated parties on behalf of the Circuit CityGroup at an aggregate selling price of $61,526,000 ($24,295,000in fiscal 2000 and $103,750,000 in fiscal 1999). Neither theCompany nor the Circuit City Group has continuing involvementunder the sale-leaseback transactions.

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9. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATIONAdvertising expense from continuing operations, which isincluded in selling, general and administrative expenses in theaccompanying statements of earnings, amounted to $422,874,000(4.0 percent of net sales and operating revenues) in fiscal 2001,$390,144,000 (3.7 percent of net sales and operating revenues) infiscal 2000 and $376,316,000 (4.0 percent of net sales and oper-ating revenues) in fiscal 1999.

10. SECURITIZATIONSOn behalf of the Circuit City Group, the Company enters intosecuritization transactions, which allow for the sale of creditcard receivables to unrelated entities, to finance the consumerrevolving credit receivables generated by its finance operation.In these securitizations, the Company retains servicing rights andsubordinated interests.

Private-label credit card receivables are financed through amaster trust securitization program. During fiscal year 2001, a$300 million, five-year public securitization related to the pri-vate-label card matured and was paid off. The Company enteredinto a $275 million, three-year public securitization in fiscal2001. As of February 28, 2001, the master trust securitizationprogram had a capacity of $1.31 billion. The master trust agree-ment has no recourse provisions.

Bankcard receivables also are financed through a master trustsecuritization program. Provisions under the master trust agreementprovide recourse to the Company for any cash flow deficiencieson $188 million of the receivables sold. The Company believesthat as of February 28, 2001, no liability existed under therecourse provisions. The bankcard securitization program had atotal program capacity of $1.94 billion as of February 28, 2001.

At February 28, 2001, the total principal amount of loansmanaged or securitized was $2,799 million. Of the total loans,the principal amount of loans securitized was $2,754 million andthe principal amount of loans held for sale was $45 million. Theprincipal amount of loans that were 31 days or more delinquentwas $192.3 million at February 28, 2001. The credit losses net ofrecoveries were $229.9 million for fiscal 2001.

The Company receives annual servicing compensation approxi-mating 2 percent of the outstanding principal loan balance of thereceivables and retains the rights to future cash flows arising afterthe investors in the securitization trusts have received the returnfor which they contracted. The servicing fees specified in the creditcard securitization agreements adequately compensate the financeoperation for servicing the securitized assets. Accordingly, noservicing asset or liability has been recorded.

The table below summarizes certain cash flows received fromand paid to securitization trusts:

Year Ended(Amounts in thousands) February 28, 2001

Proceeds from new securitizations ................................ $1,092,500Proceeds from collections reinvested

in previous credit card securitizations..................... $ 1,730,511Servicing fees received .................................................... $ 52,044Other cash flows received on retained interests*.......... $ 173,775

* This amount represents total cash flows received from retained interests bythe transferor other than servicing fees, including cash flows from interest-onlystrips and cash above the minimum required level in cash collateral accounts.

In determining the fair value of retained interests, theCompany estimates future cash flows using management’s bestestimates of key assumptions such as finance charge income,default rates, payment rates, forward yield curves and discountrates. The Company employs a risk-based pricing strategy thatincreases the stated annual percentage rate for accounts thathave a higher predicted risk of default. Accounts with a lowerrisk profile also may qualify for promotional financing.

Rights recorded for future finance income from servicedassets that exceed the contractually specified servicing fees arecarried at fair value and amounted to $131.0 million at February 28,2001, and are included in net accounts receivable. Gains on salesof $182.6 million were recorded in fiscal 2001.

The fair value of retained interests at February 28, 2001, was$246.1 million with a weighted-average life ranging from 0.4 yearsto 3 years. The table below shows the key economic assumptionsused in measuring the fair value of retained interests at February28, 2001, and a sensitivity analysis showing the hypothetical effecton the fair value of those interests when there are unfavorablevariations from the assumptions used. Key economic assumptionsat February 28, 2001, are not materially different than assumptionsused to measure the fair value of retained interests at the time ofsecuritization. These sensitivities are hypothetical and should beused with caution. In this table, the effect of a variation in aparticular assumption on the fair value of the retained interest iscalculated without changing any other assumption; in reality,changes in one factor may result in changes in another, whichmight magnify or counteract the sensitivities.

Impact on Impact on Assumptions Fair Value Fair Value

(Dollar amounts Used of 10% of 20%in thousands) (Annual) Adverse Change Adverse Change

Payment rate .............. 7.1 —11.3% $10,592 $20,107Default rate................. 7.0 —14.3% $21,159 $42,318Discount rate.............. 10.0 —15.0% $ 2,973 $ 5,892

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11. CONTINGENT LIABILITIESIn the normal course of business, the Company is involved invarious legal proceedings. Based upon the evaluation of theinformation presently available, management believes that theultimate resolution of any such proceedings will not have amaterial adverse effect on the Circuit City Group’s financial posi-tion, liquidity or results of operations.

12. APPLIANCE EXIT COSTSOn July 25, 2000, the Company announced plans to exit themajor appliance category to expand its selection of key consumerelectronics and home office products in all Circuit City Superstores.This decision reflected significant sales weakness and increasedcompetition in the major appliance category and management’searnings expectations for these other products. To exit the appli-ance business, the Company closed six distribution centers andseven service centers in fiscal 2001 and expects to close two dis-tribution centers and one service center by July 31, 2001. Themajority of these properties are leased. The Company is in theprocess of marketing these properties to be subleased. Circuit Citymaintains control over its in-home major appliance repair busi-ness, although repairs are subcontracted to an unrelated thirdparty. In the second quarter of fiscal 2001, the Company recordedappliance exit costs of $30 million. Most of these expenses areincluded in cost of sales, buying and warehousing on the state-ment of earnings for fiscal 2001. There were no adjustments tothe exit costs as of February 28, 2001.

Approximately 850 employees have been terminated andapproximately 100 employees will be terminated as locationsclose or consolidate. These reductions were mainly in the service,distribution and merchandising functions. Because severance isbeing paid to employees on a bi-weekly schedule based on yearsof service, cash payments lag job eliminations. The exit costsalso include $17.8 million for lease termination costs and $5.0million, net of salvage value, for the write-down of fixed assets.

ExpensesTotal Paid or Liability atExit Assets February 28,

(Amounts in millions) Costs Written Off 2001

Lease termination costs................... $17.8 $ 1.8 $16.0Fixed asset write-downs ................. 5.0 5.0 —Employee termination benefits...... 4.4 2.2 2.2 Other .................................................. 2.8 2.8 —

Appliance exit costs ........................ $30.0 $11.8 $18.2

13. DISCONTINUED OPERATIONSOn June 16, 1999, Digital Video Express announced that it

would cease marketing the Divx home video system and discon-tinue operations, but that existing, registered customers wouldbe able to view discs during a two-year phase-out period. Theoperating results of Divx and the loss on disposal of the Divxbusiness have been segregated from continuing operations andreported as separate line items, after taxes, on the Circuit CityGroup statements of earnings for the periods presented.Discontinued operations also have been segregated on theCircuit City Group statements of cash flows for the periods presented. However, Divx is not segregated on the Circuit CityGroup balance sheets.

For fiscal 2001, the discontinued Divx operations had noimpact on the net earnings of the Circuit City Group. The lossfrom the discontinued Divx operations totaled $16.2 millionafter an income tax benefit of $9.9 million in fiscal 2000 and$68.5 million after an income tax benefit of $42.0 million infiscal 1999. The loss on the disposal of the Divx business totaled$114.0 million after an income tax benefit of $69.9 million infiscal 2000. The loss on the disposal includes a provision foroperating losses to be incurred during the phase-out period. Italso includes provisions for commitments under licensing agree-ments with motion picture distributors, the write-down of assetsto net realizable value, lease termination costs, employee sever-ance and benefit costs and other contractual commitments.

The net liabilities of the discontinued Divx operationsreflected in the accompanying Group balance sheets as ofFebruary 28 or 29 are comprised of the following:

(Amounts in thousands) 2001 2000

Current assets................................................... $ 8 $ 612Property and equipment, net......................... — 513Other assets....................................................... 324 —Current liabilities ............................................. (27,522) (32,650)Other liabilities ................................................. (14,082) (35,291)

Net liabilities of discontinued operations...... $(41,272) $(66,816)

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14. QUARTERLY FINANCIAL DATA (UNAUDITED)

First Quarter Second Quarter Third Quarter Fourth Quarter Year(Amounts in thousands) 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000

Net sales and operating revenues...... $2,449,110 $2,204,919 $2,506,220 $2,422,667 $2,325,576 $2,495,649 $3,177,131 $3,476,171 $10,458,037 $10,599,406

Gross profit ........................................... $ 597,800 $ 540,731 $ 582,916 $ 604,503 $ 510,449 $ 618,182 $ 774,398 $ 858,776 $ 2,465,563 $ 2,622,192

Earnings (loss) from continuing

operations before Inter-Group

Interest in the CarMax Group ..... $ 46,714 $ 39,311 $ 43,196 $ 71,234 $ (70,055) $ 54,714 $ 95,383 $ 161,453 $ 115,238 $ 326,712

Earnings (loss) from continuing

operations....................................... $ 57,123 $ 41,398 $ 55,341 $ 73,692 $ (64,407) $ 52,335 $ 101,190 $ 160,149 $ 149,247 $ 327,574

Loss from discontinued

operations....................................... $ — $ (130,240) $ — $ — $ — $ — $ — $ — $ — $ (130,240)

Net earnings (loss)................................ $ 57,123 $ (88,842) $ 55,341 $ 73,692 $ (64,407) $ 52,335 $ 101,190 $ 160,149 $ 149,247 $ 197,334

Independent Auditors� Report

The Board of Directors and Stockholders of Circuit City Stores, Inc.:

We have audited the accompanying balance sheets of theCircuit City Group (as defined in Note 1) as of February 28, 2001and February 29, 2000 and the related statements of earnings,group equity and cash flows for each of the fiscal years in thethree-year period ended February 28, 2001. These financial state-ments are the responsibility of Circuit City Stores, Inc.’s manage-ment. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with auditing stan-dards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial state-ment presentation. We believe that our audits provide a reason-able basis for our opinion.

As more fully discussed in Note 1, the financial statementsof the Circuit City Group should be read in conjunction withthe consolidated financial statements of Circuit City Stores,

Inc. and subsidiaries and the financial statements of theCarMax Group.

The Circuit City Group has accounted for its interest in theCarMax Group in a manner similar to the equity method ofaccounting. Accounting principles generally accepted in theUnited States of America require that the CarMax Group beconsolidated with the Circuit City Group.

In our opinion, except for the effects of not consolidating the Circuit City Group and the CarMax Group as discussed inthe preceding paragraph, the financial statements referred toabove present fairly, in all material respects, the financial position of the Circuit City Group as of February 28, 2001 andFebruary 29, 2000 and the results of its operations and its cashflows for each of the fiscal years in the three-year period endedFebruary 28, 2001 in conformity with accounting principlesgenerally accepted in the United States of America.

Richmond, VirginiaApril 2, 2001

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The common stock of Circuit City Stores, Inc. consists of twocommon stock series, which are intended to reflect the perfor-mance of the Company's two businesses. The CarMax GroupCommon Stock is intended to track the performance of theCarMax stores and related operations. The Circuit City GroupCommon Stock is intended to track the performance of theCircuit City business and related operations and the Group’sretained interest in the CarMax Group. The Circuit City Group’sretained interest is not considered outstanding CarMax GroupCommon Stock.

Holders of Circuit City Group Common Stock and holders ofCarMax Group Common Stock are shareholders of the Companyand as such are subject to all of the risks associated with an invest-ment in the Company and all of its businesses, assets and liabili-ties. The results of operations or financial condition of one Groupcould affect the results of operations or financial condition of theother Group. The discussion and analysis for the CarMax Grouppresented below should be read in conjunction with the discussionand analysis for Circuit City Stores, Inc. and for the Circuit CityGroup and in conjunction with all the Company’s SEC filings.

Reported earnings and losses attributed to the CarMax GroupCommon Stock exclude the earnings and losses attributed to theCircuit City Group’s retained interest, which was 74.6 percent atFebruary 28, 2001, 74.7 percent at February 29, 2000, and 76.6percent at February 28, 1999.

RESULTS OF OPERATIONSSales GrowthTotal sales for the CarMax Group increased 24 percent in fiscal2001 to $2.50 billion. In fiscal 2000, total sales increased 37 per-cent to $2.01 billion from $1.47 billion in fiscal 1999. The fiscal2001 total sales increase reflects a 17 percent increase in thecomparable store sales of the CarMax business, driven byhigher-than-anticipated used-car sales, and the net addition oftwo used-car superstores, two prototype satellite stores and sixnew-car franchises since the end of fiscal 1999. The new storesand four of the franchises moved into the comparable store salesbase throughout fiscal 2001.

PERCENTAGE SALES CHANGE FROM PRIOR YEAR

Fiscal Total Comparable

2001............................................................................ 24% 17 %2000 ........................................................................... 37% 2 %1999 ........................................................................... 68% (2)%1998 ........................................................................... 71% 6 %1997 ........................................................................... 85% 23 %

PERCENT VEHICLE SALES BY CATEGORY

Fiscal 2001 2000 1999 1998 1997

Vehicle Dollars:Used Vehicles......... 81% 79% 90% 89% 88%New Vehicles.......... 19% 21% 10% 11% 12%

Vehicle Units:Used Vehicles......... 87% 86% 94% 93% 92%New Vehicles.......... 13% 14% 6% 7% 8%

We believe CarMax’s fiscal 2001 sales performance primarilyreflects the improved execution of the CarMax offer at individ-ual stores, increased awareness and use of the CarMax Web siteand the exit of CarMax’s primary used-car superstore competitorlate in fiscal 2000. We believe this competitor’s exit from fivemulti-store markets helped eliminate consumer confusion overthe two offers. CarMax’s used-car comparable store sales growthremained strong through the fiscal 2001 anniversary of thiscompetitor’s exit from the used-car superstore business. We alsobelieve that the continuation of CarMax’s robust used-car salesgrowth during the second half of the fiscal year indicates thatthe CarMax used-car concept offers strong consumer value andcan generate steady sales growth in an economic downturn.

Geographic expansion of the CarMax used-car superstore con-cept and the addition of new-car franchises were the primary con-tributors to CarMax's total sales growth from fiscal 1999 throughthe first half of fiscal 2000. Throughout this period, weak used-carsales more than offset CarMax’s strong comparable store salesgrowth in new cars. Late in fiscal 1999, CarMax adopted a hub andsatellite operating strategy in existing multi-store markets. Underthe hub and satellite operating model, a satellite store delivers thesame consumer offer as a hub store, but uses the reconditioning,purchasing and business office operations of a nearby hub store.The prototype satellites require one-half to one-third the acreage ofa standard “A” store. In fiscal 1999, we converted five CarMaxsuperstores in multi-store markets to satellite operations andopened two prototype satellite stores. During fiscal 2000, weopened two CarMax used-car superstores, two prototype satelliteused-car superstores, five stand-alone new-car stores and one new-car franchise that was integrated with a used-car superstore.CarMax also converted one existing store into a satellite operationand relocated one franchise next to a used-car superstore.

In the second half of fiscal 2000, CarMax limited its geo-graphic expansion to focus on building sales and profitability inexisting markets. The sales pace improved at CarMax's used-carsuperstores, including those stores with integrated new-car fran-chises, and the Group generated comparable store sales growthfor the last two quarters and for the fiscal year. That success con-tinued in fiscal 2001 with strong comparable store sales through-out the year and used-car sales that exceeded expectations in allfour quarters. During the year, CarMax added two new-car fran-chises, integrating them with existing used-car superstores.

Although the performance of the used-car superstores andintegrated used- and new-car superstores exceeded expectationsin fiscal 2001, we have been disappointed by the performance ofthe stand-alone new-car stores. Operations at these stores haveimproved significantly versus their levels prior to acquisition;however, they remain below our expectations.

Carmax Group Management�s Discussion and Analysis of Results of Operations And Financial Condition

RETAIL UNITS*

Retail Units at Year-EndFiscal 2001 2000 1999 1998 1997

“C” and “B” Stores....................... 14 14 13 8 2“A” Stores....................................... 17 17 16 10 5Prototype Satellite Stores............. 4 4 2 — —Stand-Alone New-Car Stores...... 5 5 — — —

Total ............................................... 40 40 31 18 7

* CarMax opened two prototype satellite stores in late fiscal 1999 and two proto-type satellite stores in late fiscal 2000. In addition to the four prototype satellitestores in operation, six “A,” “B” or “C” stores have been converted to satelliteoperations. “C” stores represent the largest format.

NEW-CAR FRANCHISES

New-Car Franchises at Year-EndFiscal 2001 2000 1999 1998 1997

Integrated/Co-LocatedNew-Car Franchises ............. 17 15 16 2 1

Stand-Alone New-Car Franchises............... 5 5 — — —

Total New-Car Franchises .......... 22 20 16 2 1

In most states, the Group sells extended warranties on behalf ofunrelated third parties who are the primary obligors. Under thisthird-party warranty program, we have no contractual liability tothe customer. In states where third-party warranty sales were notpermitted, the Group has sold its own extended warranty for whichwe are the primary obligor. Gross dollar sales from all extendedwarranty programs were 4.0 percent of total sales of the CarMaxbusiness in fiscal 2001, 3.7 percent in fiscal 2000 and 4.3 percentin fiscal 1999. The fiscal 2001 increase reflects the increase inused-car sales as a percentage of the overall mix, enhanced manu-facturers’ programs on new cars and improved warranty penetra-tion. Used cars achieve a higher warranty penetration rate thannew cars. The fiscal 2000 decrease reflects the increase in new-carsales as a percentage of the overall mix. Total extended warrantyrevenue, which is reported in total sales, was 1.8 percent of totalsales in fiscal 2001, 1.6 percent in fiscal 2000 and 2.0 percent infiscal 1999. Third-party extended warranty revenue was 1.8 per-cent of total sales in fiscal 2001, 1.6 percent in fiscal 2000 and 1.9percent in fiscal 1999.

IMPACT OF INFLATION. Inflation has not been a significantcontributor to results. For the CarMax business, profitability isbased on achieving specific gross profit dollars per vehiclerather than on average retail prices. Because the wholesale mar-ket generally adjusts to reflect retail price trends, we believethat if the stores meet inventory turn objectives, then changesin average retail prices will have only a short-term impact onthe gross margin and thus profitability of that business.

Cost of SalesThe gross profit margin was 13.2 percent in fiscal 2001, 11.9 per-cent in fiscal 2000 and 11.7 percent in fiscal 1999. At the end offiscal 1998, CarMax instituted a profit improvement plan thatincluded better inventory management, increased retail servicesales, pricing adjustments and the addition of consumer electron-

ics accessory sales. CarMax’s gross profit margins have improvedsignificantly since that time. In fiscal 2001, the increase in used-car sales as a percent of the total sales mix and continued stronginventory management throughout the year, especially during thesecond half when the model-year transition occurs in the new-car segment, contributed to a higher gross margin. Significantincreases in unit sales of new cars as a percentage of total unitsales limited the gross margin improvement in fiscal 2000.

Selling, General and Administrative ExpensesSelling, general and administrative expenses were 9.8 percent ofsales in fiscal 2001, 11.3 percent of sales in fiscal 2000 and 13.9percent of sales in fiscal 1999. The fiscal 2001 selling, general andadministrative expense ratio continued the improvement experi-enced in fiscal 2000 and reflects the leverage achieved fromstrong total and comparable store sales growth; more efficientadvertising expenditures; overall improvements in store produc-tivity, including those achieved through the hub and satelliteoperating strategy we adopted in multi-store markets; and afavorable contribution from the finance operation. The fiscal 2001improvements were partly offset by an $8.7 million write-off ofgoodwill associated with two underperforming stand-alone new-car franchises. Excluding these costs, the fiscal 2001 expense ratiowould have been 9.4 percent of sales. The fiscal 2000 improve-ments were partly offset by $4.8 million in charges related to leasetermination costs on undeveloped property and a write-down ofassets associated with excess property for sale. Excluding thesecosts, the fiscal 2000 expense ratio would have been 11.1 percentof sales. The higher ratio in fiscal 1999 reflects the costs associ-ated with the expansion of CarMax superstores and the below-plan sales in a number of multi-store metropolitan markets.Profits generated by CarMax’s finance operation and fees receivedfor arranging financing through third parties are recorded as areduction to selling, general and administrative expenses.

Interest ExpenseInterest expense was relatively unchanged as a percent of salesacross the three-year period, at 0.5 percent of sales in fiscal 2001and fiscal 2000 and 0.4 percent of sales in fiscal 1999. Interestexpense was incurred primarily on allocated debt to fund newstore growth, franchise acquisitions and working capital, includ-ing inventory.

Earnings (Loss) Before Income TaxesEarnings before income taxes were $73.5 million in fiscal 2001,significantly exceeding our original expectations. Fiscal 2000earnings before income taxes were $1.8 million. In the fourthquarter of fiscal 2001, CarMax recorded a pretax charge of $8.7million relating to the write-off of goodwill associated with twounderperforming stand-alone new-car franchises. Excluding thesecharges, earnings before income taxes were $82.2 million. In thefourth quarter of fiscal 2000, CarMax recorded a pretax charge of$4.8 million relating to lease termination costs on undevelopedproperty and the write-down of assets associated with excessproperty for sale. Excluding these charges, earnings before incometaxes were $6.6 million. For fiscal 1999, CarMax recorded a pretaxloss of $38.5 million.

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Income TaxesThe Group’s effective income tax rate was 38.0 percent in fiscal2001 and fiscal 2000, compared with 39.0 percent in fiscal 1999.In fiscal 1999, the CarMax Group generated a loss and thereforerecorded related income tax benefits.

Net Earnings (Loss)Net earnings were $45.6 million in fiscal 2001, compared withnet earnings of $1.1 million in fiscal 2000 and a net loss of$23.5 million in fiscal 1999. Excluding the write-off of goodwill,net earnings would have been $51.0 million in fiscal 2001.Excluding lease termination costs and the write-down of assets,net earnings would have been $4.1 million in fiscal 2000.

Net earnings attributed to the CarMax Group Common Stockwere $11.6 million in fiscal 2001, compared with $256,000 infiscal 2000 and a net loss of $5.5 million in fiscal 1999.

Operations OutlookWe believe that the higher-than-expected sales and earningsgrowth produced in fiscal 2001 indicates that the CarMax busi-ness has developed a store concept that can generate sustainedprofits. We believe that we have in place the infrastructure thatwill enable CarMax to maintain its improved level of execution,generate additional comparable store sales growth and resumegeographic expansion.

In single-store markets, our most mature CarMax stores havecaptured market shares of 8 percent to 10 percent. We have iden-tified approximately 35 additional markets that could support an“A” store, the standard CarMax store size going forward. Weexpect to enter two of these markets, Sacramento, Calif., andGreensboro, N.C., in late fiscal 2002. We also believe that we canadd another 10 satellite CarMax stores in our existing multi-store markets. Assuming the CarMax used-car business contin-ues to meet our expectations, we plan to open, in fiscal 2003,four to six stores, including openings in single-store markets andsatellite stores in existing multi-store markets, and, in fiscal2004 through fiscal 2006, six to eight stores per year, againfocusing near-term growth on single-store markets or satellites.

Based on the performance of the existing used-car super-stores, we believe that a standard “A” store in a single-storemarket will at maturity produce sales in the $50 million to $100million range and a pretax, before non-store overhead, storeoperating profit margin in the range of 5.0 percent to 9.5 per-cent. We believe a satellite store at maturity will produce sales inthe $36 million to $72 million range and a pretax, before non-store overhead, store operating profit margin in the range of 5.0percent to 9.3 percent. In both cases, maturity is assumed to bethe fifth year of operation. If we meet our store opening andsales per store objectives, we believe that CarMax can produceannual sales volumes of $5 billion within five years. Non-storeoverhead, which includes all field operating expenses outside thestore as well as corporate overhead, was 2.3 percent of sales infiscal 2001, and we estimate it will decline to approximately 1.7 percent of sales when annual volumes reach $5 billion.

Given the strong fiscal 2001 performance, we are highly opti-mistic about our growth plan for CarMax. Nevertheless, we will

proceed cautiously as we seek to ensure that all sales growth isprofitable sales growth and that we are delivering an attractivereturn on investment.

RECENT ACCOUNTING PRONOUNCEMENTSRefer to the “Management’s Discussion and Analysis of Resultsof Operations and Financial Condition” for Circuit City Stores,Inc. for a review of recent accounting pronouncements.

FINANCIAL CONDITIONIn fiscal 2001, net cash provided by CarMax operating activitieswas $17.8 million. The fiscal 2001 increase reflects a $44.4 mil-lion increase in net earnings, offset by an increase in inventory.Net cash used in operating activities was $24.0 million in fiscal2000 and $80.3 million in fiscal 1999. For the three-year period,cash primarily was used to purchase inventory related to compa-rable store sales growth, store openings and additional new-carfranchises. In fiscal 1999, cash also was used to fund net losses.

Most financial activities, including the investment of surpluscash and the issuance and repayment of short-term and long-term debt, are managed by the Company on a centralized basis.Allocated debt of the CarMax Group consists of (1) Companydebt, if any, that has been allocated in its entirety to the CarMaxGroup and (2) a portion of the Company’s debt that is allocatedbetween the Circuit City Group and the CarMax Group. Thispooled debt bears interest at a rate based on the average pooleddebt balance. Expenses related to increases in pooled debt arereflected in the weighted average interest rate of the pooled debt.

During fiscal 2001, a term loan totaling $175 million wasrepaid using the Company's existing working capital. In addi-tion, a term loan totaling $130 million and due in June 2001was classified as a current liability. Although we have the abilityto refinance this debt, we intend to repay it using existing workingcapital. Payment of corporate pooled debt does not necessarilyresult in a reduction of CarMax Group allocated debt.

The CarMax Group’s capital expenditures were $10.8 millionin fiscal 2001, $45.4 million in fiscal 2000 and $138.3 million infiscal 1999. In fiscal 2001, CarMax’s capital expenditures pri-marily were related to equipment purchases. CarMax’s capitalexpenditures through fiscal 2000 primarily were related to storeexpansion. Capital expenditures for the CarMax Group havebeen funded through sale-leaseback transactions, landlord reim-bursements and allocated short- and long-term debt. In fiscal2002, CarMax anticipates capital expenditures of approximately$80 million, primarily related to new store construction. Fixedasset sales, sale-leasebacks and landlord reimbursements trans-actions totaled $15.5 million in fiscal 2001, $25.3 million in fiscal2000 and $139.3 million in fiscal 1999.

During fiscal 2001, CarMax acquired one new-car franchisefor a total of $1.3 million. In fiscal 2000, CarMax acquired fivenew-car franchises for a total of $34.8 million. These acquisitionswere financed through available cash resources, including allocateddebt. Costs in excess of the acquired net tangible assets, whichwere primarily inventory, were recorded as goodwill and covenantsnot to compete.

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The Company has an asset securitization program operatedthrough a special purpose subsidiary on behalf of CarMax. Atthe end of fiscal 2001, that program allowed the transfer of up to$450 million in automobile loan receivables. In October 1999,the Company formed an owner trust securitization facility thatallowed for a $644 million securitization of automobile loanreceivables in the public market. At February 28, 2001, the pro-gram had a capacity of $329 million. In January 2001, theCompany formed an additional owner trust securitization facilitythat allowed for a $655 million securitization of automobile loanreceivables in the public market. The program had a capacity of$655 million at the end of fiscal 2001. Securitized receivablesunder all CarMax programs totaled $1.28 billion at the end offiscal 2001. Under the securitization programs, receivables aresold to unaffiliated third parties with the servicing rightsretained. We expect that these securitization programs can beexpanded to accommodate future receivables growth.

CarMax expects to open two used-car superstores late in fiscal2002 and assuming the business continues to meet our expecta-tions, as many as 30 stores over the following four years. The ini-tial cash investment per store is expected to be in the range of$22 million to $30 million for an “A” store and $11 million to$18 million for a satellite store. The initial investment includesthe land and building; furniture, fixtures and equipment; inven-tory; and CarMax’s seller’s interest in the automobile loan receiv-ables of the Group’s finance operation. These investments areexpected primarily to be funded through sale-leasebacks, securiti-zation of receivables or floor plan financing for inventory. IfCarMax takes full advantage of building and land sale-leasebackand inventory financing, the net cash investment per store isexpected to be $4 million to $6 million for an “A” store and $2million to $3 million for a satellite store.

We believe that the proceeds from sales of property andequipment and receivables, future increases in the Company'sdebt allocated to the CarMax Group, Inter-Group loans, floorplan financing and cash generated by operations will be suffi-cient to fund the capital expenditures and operations of theCarMax business.

MARKET RISKThe Company manages the automobile installment loan portfolioof the CarMax finance operation. A portion of this portfolio issecuritized and, therefore, is not presented on the Group’s balancesheets. Interest rate exposure relating to these receivables repre-sents a market risk exposure that the Company has managed withmatched funding and interest rate swaps. Total principal outstand-ing for fixed-rate automobile loans at February 28, 2001, andFebruary 29, 2000, was as follows:

(Amounts in millions) 2001 2000

Fixed APR.............................................................. $1,296 $932

Financing for these receivables is achieved through asset securi-tization programs that, in turn, issue both fixed- and floating-ratesecurities. Interest rate exposure is hedged through the use of inter-est rate swaps matched to projected payoffs. Receivables held bythe Company for sale are financed with working capital. Financingsat February 28, 2001, and February 29, 2000, were as follows:

(Amounts in millions) 2001 2000

Fixed-rate securitizations................................. $ 984 $559Floating-rate securitizations

synthetically altered to fixed...................... 299 327Floating-rate securitizations ............................. 1 1Held by the Company:

For investment*.............................................. 9 22For sale......................................................... 3 23

Total ...................................................................... $1,296 $932

* Held by a bankruptcy remote special purpose company.

The Company has analyzed its interest rate exposure and hasconcluded that it did not represent a material market risk atFebruary 28, 2001, or February 29, 2000. The Company has aprogram in place to manage interest rate exposure relating to itsinstallment loan portfolio and expects to experience relativelylittle impact as interest rates fluctuate.

FORWARD-LOOKING STATEMENTSCompany statements that are not historical facts, includingstatements about management’s expectations for fiscal year2002 and beyond, are forward-looking statements and involvevarious risks and uncertainties. Refer to the “Circuit City Stores,Inc. Management’s Discussion and Analysis of Results ofOperations and Financial Condition” for a review of possiblerisks and uncertainties.

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CarMax Group Statements of Operations

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Years Ended February 28 or 29(Amounts in thousands) 2001 % 2000 % 1999 %

NET SALES AND OPERATING REVENUES......................................... $2,500,991 100.0 $2,014,984 100.0 $1,466,298 100.0Cost of sales ................................................................................ 2,171,232 86.8 1,774,619 88.1 1,294,032 88.3

GROSS PROFIT............................................................................... 329,759 13.2 240,365 11.9 172,266 11.7

Selling, general and administrative expenses [NOTES 1 and 10] ........................................................... 244,167 9.8 228,200 11.3 204,422 13.9

Interest expense [NOTES 1 AND 5] .................................................... 12,110 0.5 10,362 0.5 6,393 0.4

TOTAL EXPENSES............................................................................ 256,277 10.3 238,562 11.8 210,815 14.3

Earnings (loss) before income taxes ........................................ 73,482 2.9 1,803 0.1 (38,549) (2.6)Income tax provision (benefit) [NOTES 1 AND 6] ............................ 27,918 1.1 685 0.0 (15,035) (1.0)

NET EARNINGS (LOSS).................................................................... $ 45,564 1.8 $ 1,118 0.1 $ (23,514) (1.6)

Net earnings (loss) attributed to [NOTE 1]:Circuit City Group Common Stock..................................... $ 34,009 $ 862 $ (18,057)CarMax Group Common Stock ........................................... 11,555 256 (5,457)

$ 45,564 $ 1,118 $ (23,514)

See accompanying notes to Group financial statements.

At February 28 or 29(Amounts in thousands) 2001 2000

ASSETS

CURRENT ASSETS:

Cash and cash equivalents..................................................................................................................... $ 8,802 $ 9,981Net accounts receivable [NOTE 11] ............................................................................................................. 134,662 129,253Inventory.................................................................................................................................................. 347,137 283,592Prepaid expenses and other current assets .......................................................................................... 2,306 2,844

TOTAL CURRENT ASSETS ............................................................................................................................ 492,907 425,670Property and equipment, net [NOTES 4 AND 5]............................................................................................ 192,158 211,856Other assets .............................................................................................................................................. 25,888 37,969

TOTAL ASSETS ............................................................................................................................................ $710,953 $675,495

LIABILITIES AND GROUP EQUITY

CURRENT LIABILITIES:

Current installments of long-term debt [NOTE 5] .................................................................................... 108,151 $ 91,609Accounts payable .................................................................................................................................... 82,483 75,959Short-term debt [NOTE 5]............................................................................................................................ 987 1,552Accrued expenses and other current liabilities ................................................................................... 16,154 19,856Deferred income taxes [NOTE 6]................................................................................................................. 18,162 7,147

TOTAL CURRENT LIABILITIES ...................................................................................................................... 225,937 196,123Long-term debt, excluding current installments [NOTE 5] ..................................................................... 83,057 121,257Deferred revenue and other liabilities .................................................................................................. 6,836 7,249Deferred income taxes [NOTE 6]................................................................................................................. 3,620 5,877

TOTAL LIABILITIES....................................................................................................................................... 319,450 330,506GROUP EQUITY........................................................................................................................................... 391,503 344,989

Commitments and contingent liabilities [NOTES 1, 8, 9, 11, 12 AND 13]

TOTAL LIABILITIES AND GROUP EQUITY..................................................................................................... $710,953 $675,495

See accompanying notes to Group financial statements.

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CarMax Group Balance Sheets

CarMax Group Statements of Cash Flows

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Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

OPERATING ACTIVITIES:

Net earnings (loss)................................................................................................... $ 45,564 $ 1,118 $ (23,514)Adjustments to reconcile net earnings (loss) to net cash provided by

(used in) operating activities:Depreciation and amortization ........................................................................ 18,116 15,241 10,003Write-down of assets and lease termination costs [NOTE 10] ........................... 8,677 4,755 —Loss (gain) on disposition of property and equipment ................................. 415 (820) —Provision for deferred income taxes ............................................................... 8,758 1,225 11,284Changes in operating assets and liabilities, net of effects

from business acquisitions:(Decrease) increase in deferred revenue and other liabilities ................. (413) 2,234 (251)Increase in net accounts receivable ........................................................... (5,409) (31,889) (36,498)Increase in inventory................................................................................... (62,745) (39,909) (81,490)Decrease (increase) in prepaid expenses and other current assets ........... 538 (2,224) 25,714Decrease (increase) in other assets ............................................................. 424 1,255 (809)Increase in accounts payable, accrued expenses and

other current liabilities........................................................................... 3,881 25,016 15,229

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................................ 17,806 (23,998) (80,332)

INVESTING ACTIVITIES:

Cash used in business acquisitions [NOTE 3]............................................................ (1,325) (34,849) (41,562)Purchases of property and equipment.................................................................. (10,834) (45,395) (138,299)Proceeds from sales of property and equipment................................................. 15,506 25,340 139,332

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......................................... 3,347 (54,904) (40,529)

FINANCING ACTIVITIES:

(Decrease) increase in allocated short-term debt, net......................................... (565) (3,053) 1,220(Decrease) increase in allocated long-term debt, net.......................................... (21,658) 71,896 108,584Equity issuances, net............................................................................................... (109) 2,361 2,324

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........................................ (22,332) 71,204 112,128

Decrease in cash and cash equivalents ...................................................................... (1,179) (7,698) (8,733)Cash and cash equivalents at beginning of year...................................................... 9,981 17,679 26,412

Cash and cash equivalents at end of year ................................................................. $ 8,802 $ 9,981 $ 17,679

See accompanying notes to Group financial statements.

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(Amounts in thousands)

BALANCE AT MARCH 1, 1998...................................................................................................................................................................... $ 359,946Net loss ................................................................................................................................................................................................ (23,514)Equity issuances, net ......................................................................................................................................................................... 3,983

BALANCE AT FEBRUARY 28, 1999................................................................................................................................................................ 340,415Net earnings........................................................................................................................................................................................ 1,118Equity issuances, net ......................................................................................................................................................................... 3,456

BALANCE AT FEBRUARY 29, 2000................................................................................................................................................................ 344,989Net earnings........................................................................................................................................................................................ 45,564Equity issuances, net ......................................................................................................................................................................... 950

BALANCE AT FEBRUARY 28, 2001................................................................................................................................................................ $391,503

See accompanying notes to Group financial statements.

CarMax Group Statements of Group Equity

Notes to CarMax Group Financial Statements

1. BASIS OF PRESENTATIONThe common stock of Circuit City Stores, Inc. consists of two com-mon stock series, which are intended to reflect the performance ofthe Company's two businesses. The Circuit City Group CommonStock is intended to track the performance of the Circuit Citystore-related operations, the Group’s retained interest in theCarMax Group and the Company’s investment in Digital VideoExpress, which has been discontinued. The effects of this retainedinterest on the Circuit City Group’s financial statements are identi-fied by the term “Inter-Group.” The CarMax Group Common Stockis intended to track the performance of the CarMax Group's oper-ations. The Inter-Group Interest is not considered outstandingCarMax Group Common Stock. Therefore, any net earnings or lossattributed to the Inter-Group Interest is not included in theCarMax Group’s per share calculations. The Circuit City Groupheld a 74.6 percent interest in the CarMax Group at February 28,2001, a 74.7 percent interest in the CarMax Group at February 29,2000, and a 76.6 percent interest at February 28, 1999. The termsof each series of common stock are discussed in detail in theCompany's Form 8-A registration statement on file with the SEC.

Notwithstanding the attribution of the Company’s assets andliabilities, including contingent liabilities, and stockholders’ equitybetween the CarMax Group and the Circuit City Group for thepurposes of preparing the financial statements, holders of CarMaxGroup Common Stock and holders of Circuit City Group CommonStock are shareholders of the Company and continue to be subjectto all of the risks associated with an investment in the Companyand all of its businesses, assets and liabilities. Such attribution andthe equity structure of the Company do not affect title to theassets or responsibility for the liabilities of the Company or any ofits subsidiaries. The results of operations or financial condition ofone Group could affect the results of operations or financial con-dition of the other Group. Net losses of either Group, and divi-dends or distributions on, or repurchases of, Circuit City GroupCommon Stock or CarMax Group Common Stock will reducefunds legally available for dividends on, or repurchases of, bothstocks. Accordingly, the CarMax Group financial statementsincluded herein should be read in conjunction with the Company’sconsolidated financial statements, the Circuit City Group financialstatements and the Company's SEC filings.

The CarMax Group’s financial statements reflect the applica-tion of the management and allocation policies adopted by theboard of directors. These policies may be modified or rescinded,or new policies may be adopted, at the sole discretion of theboard of directors, although the board of directors has no pre-sent plans to do so. These management and allocation policiesinclude the following:

(A) FINANCIAL ACTIVITIES: Most financial activities are managedby the Company on a centralized basis. Such financial activitiesinclude the investment of surplus cash and the issuance andrepayment of short-term and long-term debt. Allocated investedsurplus cash of the CarMax Group consists of (i) Company cashequivalents, if any, that have been allocated in their entirety tothe CarMax Group and (ii) a portion of the Company’s cashequivalents, if any, that are allocated between the Groups.

Allocated debt of the CarMax Group consists of (i) Company debt,if any, that has been allocated in its entirety to the CarMax Groupand (ii) a portion of the Company’s pooled debt, which is debtallocated between the Groups. The pooled debt bears interest at arate based on the average pooled debt balance. Expenses relatedto increases in pooled debt are reflected in the weighted averageinterest rate of such pooled debt.

(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporategeneral and administrative costs and other shared services gen-erally have been allocated to the CarMax Group based upon uti-lization of such services by the Group. Where determinationsbased on utilization alone have been impractical, other methodsand criteria are used that management believes are equitable andprovide a reasonable estimate of the costs attributable to theGroup. Costs allocated to the CarMax Group totaled approxi-mately $4.0 million for fiscal 2001, $5.6 million for fiscal 2000and $7.5 million for fiscal 1999.

(C) INCOME TAXES: The CarMax Group is included in the con-solidated federal income tax return and in certain state taxreturns filed by the Company. Accordingly, the financial state-ment provision and the related tax payments or refunds arereflected in each Group’s financial statements in accordance withthe Company’s tax allocation policy for such Groups. In general,this policy provides that the consolidated tax provision andrelated tax payments or refunds are allocated between theGroups based principally upon the financial income, taxableincome, credits and other amounts directly related to eachGroup. Tax benefits that cannot be used by the Group generatingsuch attributes, but can be utilized on a consolidated basis, areallocated to the Group that generated such benefits. As a result,the allocated Group amounts of taxes payable or refundable arenot necessarily comparable to those that would have resulted ifthe Groups had filed separate tax returns.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(A) CASH AND CASH EQUIVALENTS: The CarMax Group had no

cash equivalents at February 28, 2001. Cash equivalents of$1,770,000 at February 29, 2000, consist of highly liquid debtsecurities with original maturities of three months or less.

(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For trans-fers of financial assets that qualify as sales, the Company mayretain interest-only strips, one or more subordinated tranches,residual interests in a securitization trust, servicing rights and acash reserve account, all of which are retained interests in thesecuritized receivables. These retained interests are measuredbased on the fair value at the date of transfer. The Companydetermines fair value based on the present value of futureexpected cash flows using management’s best estimates of thekey assumptions such as finance charge income, default rates,prepayment rates and discount rates appropriate for the type ofasset and risk. Retained interests are included in net accountsreceivable and are carried at fair value with changes in fairvalue reflected in earnings.

(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Companyenters into financial instruments on behalf of the CarMax Group.

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The carrying value of the Company's financial instruments,excluding interest rate swaps held for hedging purposes, approxi-mates fair value. Credit risk is the exposure created by the poten-tial nonperformance of another material party to an agreementbecause of changes in economic, industry or geographic factors.The Company mitigates credit risk by dealing only with counter-parties that are highly rated by several financial rating agencies.Accordingly, the Company does not anticipate material loss fornonperformance. The Company broadly diversifies all financialinstruments along industry, product and geographic areas.

(D) INVENTORY: Inventory is stated at the lower of cost or mar-ket. Vehicle inventory cost is determined by specific identification.Parts and labor used to recondition vehicles, as well as transporta-tion and other incremental expenses associated with acquiringvehicles, are included in inventory.

(E) PROPERTY AND EQUIPMENT: Property and equipment isstated at cost less accumulated depreciation. Depreciation is cal-culated using the straight-line method over the assets’ estimateduseful lives.

(F) COMPUTER SOFTWARE COSTS: The Company accounts forcomputer software costs in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position98-1, “Accounting for the Costs of Computer Software Developedor Obtained for Internal Use.” Once the capitalization criteria ofSOP 98-1 have been met, external direct costs of materials andservices used in the development of internal-use software andpayroll and payroll-related costs for employees directly involvedin the development of internal-use software are capitalized.Amounts capitalized are amortized on a straight-line basis overa period of three to five years.

(G) INTANGIBLE ASSETS: Amounts paid for acquired businessesin excess of the fair value of the net tangible assets acquired arerecorded as goodwill, which is amortized on a straight-line basisover 15 years, and covenants not to compete, which are amor-tized on a straight-line basis over the life of the covenant not toexceed five years. Both goodwill and covenants not to competeare included in other assets on the accompanying CarMaxGroup balance sheets. The carrying values of intangible assetsare periodically reviewed by the Company and impairments arerecognized when the expected future undiscounted operatingcash flows expected from such intangible assets are less thanthe carrying values.

(H) PRE-OPENING EXPENSES: Effective March 1, 1999, theCompany adopted SOP 98-5, “Reporting on the Costs of Start-UpActivities.” SOP 98-5 requires costs of start-up activities, includ-ing organization and pre-opening costs, to be expensed asincurred. Prior to fiscal 2000, the Company capitalized pre-open-ing costs for new store locations. Beginning in the month afterthe store opened for business, the pre-opening costs were amor-tized over the remainder of the fiscal year.

(I) INCOME TAXES: Income taxes are accounted for in accor-dance with SFAS No. 109, “Accounting for Income Taxes.”Deferred income taxes reflect the impact of temporary differ-ences between the amounts of assets and liabilities recognizedfor financial reporting purposes and the amounts recognized for

income tax purposes, measured by applying currently enactedtax laws. A deferred tax asset is recognized if it is more likelythan not that a benefit will be realized.

(J) REVENUE RECOGNITION: The CarMax Group recognizes rev-enue when the earnings process is complete, generally at either thetime of sale to a customer or upon delivery to a customer.

(K) DEFERRED REVENUE: The CarMax Group sells service con-tracts on behalf of unrelated third parties and, prior to July 1997,sold its own contracts at one location where third-party saleswere not permitted. Contracts usually have terms of coveragebetween 12 and 72 months. Commission revenue for the unre-lated third-party service contracts is recognized at the time ofsale, because the third parties are the primary obligors underthese contracts. Inasmuch as CarMax is the primary obligor on itsown contracts, all revenue from the sale of these contracts wasdeferred and amortized over the life of the contracts consistentwith the pattern of repair experience of the industry. Incrementaldirect costs related to the sale of contracts were deferred andcharged to expense in proportion to the revenue recognized.

(L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operatingprofits generated by the finance operation are recorded as areduction to selling, general and administrative expenses.

(M) ADVERTISING EXPENSES: All advertising costs are expensedas incurred.

(N) STOCK-BASED COMPENSATION: The Company accounts forstock-based compensation in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting For Stock Issuedto Employees,” and provides the pro forma disclosures of SFASNo. 123, “Accounting for Stock-Based Compensation.”

(O) DERIVATIVE FINANCIAL INSTRUMENTS: The Company entersinto interest rate swap agreements to manage exposure to inter-est rates and to more closely match funding costs to the use offunding. Swaps entered into by a seller as part of a sale of finan-cial assets are considered proceeds at fair value in the determi-nation of the gain or loss on the sale. If such a swap were to beterminated, the impact on the fair value of the financial assetcreated by the sale of the related receivables would be estimatedand included in earnings.

(P) RISKS AND UNCERTAINTIES: The CarMax Group is a used-and new-car retail business. The diversity of the CarMax Group’scustomers and suppliers reduces the risk that a severe impact willoccur in the near term as a result of changes in its customer base,competition or sources of supply. However, because of the CarMaxGroup’s limited overall size, management cannot assure thatunanticipated events will not have a negative impact on the Group.

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica requires management to make estimates and assump-tions that affect the reported amounts of assets, liabilities, rev-enues and expenses and the disclosure of contingent assets andliabilities. Actual results could differ from those estimates.

(Q) RECLASSIFICATIONS: Certain amounts in prior years have beenreclassified to conform to classifications adopted in fiscal 2001.

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3. BUSINESS ACQUISITIONSThe CarMax Group acquired the franchise rights and the relatedassets of one new-car dealership for an aggregate cost of $1.3 mil-lion in fiscal 2001, five new-car dealerships for an aggregate cost of$34.8 million in fiscal 2000 and four new-car dealerships for anaggregate cost of $49.6 million in fiscal year 1999. These acquisi-tions were financed through available cash resources, including allo-cated debt and, in fiscal 1999, the issuance of two promissory notesaggregating $8.0 million. Costs in excess of the fair value of the nettangible assets acquired (primarily inventory) have been recorded asgoodwill and covenants not to compete. These acquisitions wereaccounted for under the purchase method and the results of theoperations of each acquired franchise were included in the accompa-nying CarMax Group financial statements since the dates of acquisi-tion. Unaudited pro forma information related to these acquisitionsis not included because the impact of these acquisitions on theaccompanying CarMax Group financial statements is not material.

4. PROPERTY AND EQUIPMENTProperty and equipment, at cost, at February 28 or 29 is summa-rized as follows:

(Amounts in thousands) 2001 2000

Land and buildings (20 to 25 years) .............. $101,382 $ 81,885Land held for sale.............................................. 27,971 41,850Land held for development.............................. 4,285 17,697Construction in progress .................................. 14,324 18,010Furniture, fixtures and equipment

(3 to 8 years) ................................................ 64,866 60,225Leasehold improvements

(10 to 15 years)............................................. 21,196 19,902

234,024 239,569Less accumulated depreciation ....................... 41,866 27,713

Property and equipment, net........................... $192,158 $211,856

Land held for development is land owned for future sitesthat are scheduled to open more than one year beyond the fiscalyear reported.

5. DEBTLong-term debt of the Company at February 28 or 29 is summa-rized as follows:

(Amounts in thousands) 2001 2000

Term loans ......................................................... $230,000 $405,000Industrial Development Revenue Bonds due

through 2006 at various prime-based rates of interest ranging from 5.5% to 6.7%..... 4,400 5,419

Obligations under capital leases .................... 12,049 12,416Note payable ..................................................... 2,076 3,750

Total long-term debt........................................ 248,525 426,585Less current installments................................. 132,388 177,344

Long-term debt, excluding current installments ................................................. $116,137 $249,241

Portion of long-term debt allocated to the CarMax Group................................. $191,208 $212,866

In July 1994, the Company entered into a seven-year,$100,000,000 unsecured bank term loan. The loan was restruc-tured in August 1996 as a $100,000,000, six-year unsecuredbank term loan. Principal is due in full at maturity with interestpayable periodically at LIBOR plus 0.40 percent. At February 28,2001, the interest rate on the term loan was 5.97 percent.

In May 1995, the Company entered into a five-year,$175,000,000 unsecured bank term loan. As scheduled, theCompany used existing working capital to repay this term loanin May 2000.

In June 1996, the Company entered into a five-year,$130,000,000 unsecured bank term loan. Principal is due in fullat maturity with interest payable periodically at LIBOR plus 0.35percent. At February 28, 2001, the interest rate on the term loanwas 5.73 percent. This term loan is due in June 2001 and wasclassified as a current liability at February 28, 2001. Althoughthe Company has the ability to refinance this loan, it intends torepay the debt using existing working capital.

The Company maintains a multi-year, $150,000,000 unsecuredrevolving credit agreement with four banks. The agreement callsfor interest based on both committed rates and money marketrates and a commitment fee of 0.18 percent per annum. Theagreement was entered into as of August 31, 1996, and terminatesAugust 31, 2002. No amounts were outstanding under the revolv-ing credit agreement at February 28, 2001, or February 29, 2000.

In November 1998, the CarMax Group entered into a four-year, unsecured $5,000,000 promissory note. Principal is dueannually with interest payable periodically at 8.25 percent.

Under certain of the debt agreements, the Company mustmeet financial covenants relating to minimum tangible networth, current ratios and debt-to-capital ratios. The Companywas in compliance with all such covenants at February 28, 2001,and February 29, 2000.

Short-term debt of the Company is funded through commit-ted lines of credit and informal credit arrangements, as well asthe revolving credit agreement. Amounts outstanding and com-mitted lines of credit available are as follows:

Years Ended February 28 or 29

(Amounts in thousands) 2001 2000

Average short-term debt outstanding........ $ 56,065 $ 44,692Maximum short-term debt outstanding .... $365,275 $411,791Aggregate committed lines of credit......... $360,000 $370,000

The weighted average interest rate on the outstanding short-term debt was 6.8 percent during fiscal 2001, 5.6 percent duringfiscal 2000 and 5.1 percent during fiscal 1999.

Interest expense allocated by the Company to the CarMaxGroup, excluding interest capitalized, was $12,110,000 in fiscal2001, $10,362,000 in fiscal 2000 and $6,393,000 in fiscal 1999.The CarMax Group capitalizes interest in connection with theconstruction of certain facilities. There was no interest capitalizedin fiscal 2001. Interest capitalized amounted to $1,254,000 infiscal 2000 and $2,674,000 in fiscal 1999.

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6. INCOME TAXESThe components of the income tax provision (benefit) on netearnings (loss) are as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Current:Federal ..................................... $16,986 $(1,395) $(23,773)State ......................................... 2,174 855 (2,546)

19,160 (540) (26,319)

Deferred:Federal ..................................... 8,494 1,190 10,945State ......................................... 264 35 339

8,758 1,225 11,284

Income tax provision (benefit).... $27,918 $ 685 $(15,035)

The effective income tax rate differed from the federal statu-tory income tax rate as follows:

Years Ended February 28 or 292001 2000 1999

Federal statutory income tax rate ........ 35% 35% 35%State and local income taxes,

net of federal benefit ........................ 3% 3% 4%

Effective income tax rate....................... 38% 38% 39%

In accordance with SFAS No. 109, the tax effects of temporarydifferences that give rise to a significant portion of the deferredtax assets and liabilities at February 28 or 29 are as follows:

(Amounts in thousands) 2001 2000

Deferred tax assets:Accrued expenses ........................................ $ 5,173 $ 5,510Other .............................................................. 235 309

Total gross deferred tax assets............. 5,408 5,819

Deferred tax liabilities:Depreciation ................................................. 3,850 6,181Securitized receivables................................ 15,262 4,919Inventory ...................................................... 6,449 4,655Prepaid expenses ......................................... 1,629 3,088

Total gross deferred tax liabilities....... 27,190 18,843

Net deferred tax liability.................................. $21,782 $13,024

In assessing the realizability of deferred tax assets, manage-ment considers the scheduled reversal of deferred tax liabilities,projected future taxable income and tax planning strategies.Based on these considerations, management believes that it ismore likely than not that the gross deferred tax assets at February28, 2001, and February 29, 2000, will be realized by the CarMaxGroup; therefore, no valuation allowance is necessary.

7. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS(A) 401(k) PLAN: Effective August 1, 1999, the Company began

sponsoring a 401(k) Plan for all employees meeting certain eligi-bility criteria. Under the Plan, eligible employees can contributeup to 15 percent of their salaries, and the Company matches aportion of those associate contributions. The Company's expensefor this plan for CarMax Group associates was $686,000 in fiscal2001 and $317,000 in fiscal 2000.

(B) PREFERRED STOCK: In conjunction with the Company’sShareholders Rights Plan as amended and restated, preferred stockpurchase rights were distributed as a dividend at the rate of oneright for each share of CarMax Group Common Stock. The rightsare exercisable only upon the attainment of, or the commence-ment of a tender offer to attain, a specified ownership interest inthe Company by a person or group. When exercisable, eachCarMax Group right would entitle shareholders to buy one four-hundredth of a share of Cumulative Participating Preferred Stock,Series F, $20 par value, at an exercise price of $100 per share sub-ject to adjustment. A total of 500,000 shares of such preferredstock, which have preferential dividend and liquidation rights,have been designated. No such shares are outstanding. In theevent that an acquiring person or group acquires the specifiedownership percentage of the Company’s common stock (exceptpursuant to a cash tender offer for all outstanding shares deter-mined to be fair by the board of directors) or engages in certaintransactions with the Company after the rights become exercis-able, each right will be converted into a right to purchase, for halfthe current market price at that time, shares of the related Groupstock valued at two times the exercise price. The Company alsohas 1,000,000 shares of undesignated preferred stock authorizedof which no shares are outstanding and an additional 500,000shares of preferred stock designated as Series E, which are relatedto similar rights held by Circuit City Group shareholders.

(C) VOTING RIGHTS: The holders of both series of commonstock and any series of preferred stock outstanding and entitledto vote together with the holders of common stock will votetogether as a single voting group on all matters on which com-mon shareholders generally are entitled to vote other than amatter on which the common stock or either series thereof orany series of preferred stock would be entitled to vote as a sepa-rate voting group. On all matters on which both series of com-mon stock would vote together as a single voting group, (i) eachoutstanding share of Circuit City Group Common Stock shallhave one vote and (ii) each outstanding share of CarMax GroupCommon Stock shall have a number of votes based on theweighted average ratio of the market value of a share ofCarMax Group Common Stock to a share of Circuit City GroupCommon Stock. If shares of only one series of common stockare outstanding, each share of that series shall be entitled toone vote. If either series of common stock is entitled to vote asa separate voting group with respect to any matter, each shareof that series shall, for purposes of such vote, be entitled to onevote on such matter.

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(D) RESTRICTED STOCK: The Company has issued restrictedstock under the provisions of the 1994 Stock Incentive Planwhereby management and key employees are granted restrictedshares of CarMax Group Common Stock. Shares are awarded inthe name of the employee, who has all the rights of a share-holder, subject to certain restrictions or forfeitures. Restrictionson the awards generally expire four to five years from the date ofgrant. The market value at the date of grant of these shares hasbeen recorded as unearned compensation and is a component ofGroup equity. Unearned compensation is expensed over therestriction periods. In fiscal 2001, a total of $153,500 wascharged to operations ($447,200 in fiscal 2000 and $426,600 infiscal 1999). As of February 28, 2001, 56,667 restricted shareswere outstanding.

(E) EMPLOYEE STOCK PURCHASE PLAN: The Company hasEmployee Stock Purchase Plans for all employees meeting certaineligibility criteria. The CarMax Group Plan allows eligible employ-ees to purchase shares of CarMax Group Common Stock, subjectto certain limitations. For each $1.00 contributed by employeesunder the Plan, the Company matches $0.15. Purchases are limitedto 10 percent of an employee’s eligible compensation, up to a

maximum of $7,500 per year. At February 28, 2001, a total of581,599 shares remained available under the CarMax Group Plan.During fiscal 2001, 477,094 shares were issued to or purchased onthe open market on behalf of employees (580,000 in fiscal 2000and 268,532 in fiscal 1999). The average price per share purchasedunder the Plan was $4.18 in fiscal 2001, $3.68 in fiscal 2000 and$7.56 in fiscal 1999. The Company match or purchase price dis-count for the CarMax Group totaled $247,000 in fiscal 2001,$221,500 in fiscal 2000 and $268,100 in fiscal 1999.

(F) STOCK INCENTIVE PLANS: Under the Company’s stock incen-tive plans, nonqualified stock options may be granted to man-agement, key employees and outside directors to purchase sharesof CarMax Group Common Stock. The exercise price for non-qualified options is equal to, or greater than, the market value atthe date of grant. Options generally are exercisable over variousperiods ranging from one to seven years from the date of grant.

A summary of the status of the CarMax Group’s stock optionsand changes during the years ended February 28, 2001, February29, 2000, and February 28, 1999, are shown in Table 1. Table 2summarizes information about stock options outstanding as ofFebruary 28, 2001.

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TABLE 1 2001 2000 1999

Weighted Average Weighted Average Weighted Average(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price

Outstanding at beginning of year ................. 3,324 $3.87 4,380 $1.77 4,822 $ 1.49Granted .............................................................. 1,281 1.70 1,132 5.89 205 8.63Exercised............................................................ (56) 0.22 (2,027) 0.22 (543) 0.22Cancelled ........................................................... (442) 4.67 (161) 6.94 (104) 10.54

Outstanding at end of year............................. 4,107 $3.16 3,324 $3.87 4,380 $ 1.77

Options exercisable at end of year ................ 1,943 $2.94 1,203 $2.54 1,566 $ 0.96

TABLE 2 Options Outstanding Options Exercisable

Weighted Average(Shares in thousands) Number Remaining Weighted Average Number Weighted AverageRange of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price

$ 0.22 ............................................................... 1,578 1.0 $ 0.22 1,338 $ 0.221.63 ............................................................... 1,094 6.0 1.63 — —3.22 to 6.25................................................ 1,011 4.7 5.89 305 6.078.68 to 16.31 ................................................ 424 3.4 11.55 300 11.91

Total.................................................................... 4,107 3.5 $ 3.16 1,943 $ 2.94

The CarMax Group applies APB Opinion No. 25 and relatedinterpretations in accounting for its stock option plans.Accordingly, no compensation cost has been recognized. Hadcompensation cost been determined based on the fair value at thegrant date consistent with the methods of SFAS No. 123, the netearnings (loss) attributed to the CarMax Group would havechanged to the pro forma amounts indicated below. In accordancewith the transition provisions of SFAS No. 123, the pro formaamounts reflect options with grant dates subsequent to March 1,1995. Therefore, the full impact of calculating compensation costfor stock options under SFAS No. 123 is not reflected in the proforma net earnings (loss) amounts presented below because com-pensation cost is reflected over the options’ vesting periods andcompensation cost of options granted prior to March 1, 1995, isnot considered. The pro forma effect on fiscal year 2001 may notbe representative of the pro forma effects on net earnings (loss) forfuture years.

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Net earnings (loss):As reported............................... $11,555 $256 $(5,457)Pro forma.................................. 11,345 75 (5,537)

For the purpose of computing the pro forma amounts indi-cated above, the fair value of each option on the date of grant isestimated using the Black-Scholes option-pricing model. Theweighted average assumptions used in the model are as follows:

2001 2000 1999

Expected dividend yield .................. – – –Expected stock volatility ................. 71% 62% 50%Risk-free interest rates..................... 7% 6% 6%Expected lives (in years).................. 4 4 3

Using these assumptions in the Black-Scholes model, theweighted average fair value of options granted for the CarMaxGroup is $1 in fiscal 2001, $3 in fiscal 2000 and $3 in fiscal 1999.

8. PENSION PLANSThe Company has a noncontributory defined benefit pensionplan covering the majority of full-time employees who are atleast age 21 and have completed one year of service. The cost ofthe program is being funded currently. Plan benefits generallyare based on years of service and average compensation. Planassets consist primarily of equity securities and included 160,000shares of Circuit City Group Common Stock at February 28,2001, and February 29, 2000. Eligible employees of the CarMaxGroup participate in the Company’s plan. Pension costs for theseemployees have been allocated to the CarMax Group based onits proportionate share of the projected benefit obligation.

The following tables set forth the CarMax Group’s share ofthe Pension Plan’s financial status and amounts recognized inthe balance sheets as of February 28 or 29:

(Amounts in thousands) 2001 2000

Change in benefit obligation:Benefit obligation at beginning of year......... $ 4,443 $ 2,565Service cost ........................................................ 1,525 1,250Interest cost ........................................................ 355 173Actuarial loss ..................................................... 1,514 455

Benefit obligation at end of year.................... $ 7,837 $ 4,443

Change in plan assets:Fair value of plan assets at beginning

of year ........................................................... $ 2,715 $ 1,553Actual return on plan assets............................ (271) 537Employer contributions.................................... 1,630 625

Fair value of plan assets at end of year......... $ 4,074 $ 2,715

Reconciliation of funded status:Funded status..................................................... $(3,763) $(1,728)Unrecognized actuarial loss............................. 3,039 1,062Unrecognized transition asset ......................... (3) (6)Unrecognized prior service benefit................. (4) (6)

Net amount recognized .................................... $ (731) $ (678)

The components of net pension expense are as follows:

Years Ended February 28 or 29(Amounts in thousands) 2001 2000 1999

Service cost............................................ $1,525 $1,250 $ 525Interest cost............................................ 355 173 67Expected return on plan assets........... (283) (159) (119)Amortization of prior service cost ..... (2) (2) (1)Amortization of transitional asset ...... (3) (3) (3)Recognized actuarial loss..................... 91 77 —

Net pension expense............................. $1,683 $1,336 $ 469

Assumptions used in the accounting for the Pension Plan were:

Years Ended February 28 or 292001 2000 1999

Weighted average discount rate................... 7.5% 8.0% 6.8%Rate of increase in compensation levels..... 6.0% 6.0% 5.0%Expected rate of return on plan assets ....... 9.0% 9.0% 9.0%

The Company also has an unfunded nonqualified plan thatrestores retirement benefits for certain senior executives whoare affected by Internal Revenue Code limitations on benefitsprovided under the Company's Pension Plan. The projected ben-efit obligation under this plan and allocated to the CarMaxGroup was $500,000 at February 28, 2001, and $300,000 atFebruary 29, 2000.

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9. LEASE COMMITMENTSThe CarMax Group conducts substantially all of its business inleased premises. The CarMax Group’s lease obligations are basedupon contractual minimum rates. Rental expense for all operat-ing leases was $35,945,000 in fiscal 2001, $34,561,000 in fiscal2000 and $23,521,000 in fiscal 1999. In fiscal 2001, CarMax alsohad sublease income of $91,000. Most leases provide that theCarMax Group pay taxes, maintenance, insurance and operatingexpenses applicable to the premises.

The initial term of most real property leases will expire withinthe next 20 years; however, most of the leases have options pro-viding for additional lease terms of 10 to 20 years at terms simi-lar to the initial terms.

Future minimum fixed lease obligations, excluding taxes,insurance and other costs payable directly by the CarMax Group,as of February 28, 2001, were:

Operating(Amounts in thousands) LeaseFiscal Commitments

2002 .................................................................................... $34,3762003 .................................................................................... 34,2172004 .................................................................................... 33,6362005 .................................................................................... 33,3382006 .................................................................................... 32,606After 2006 .......................................................................... 426,262

Total minimum lease payments...................................... $594,435

In fiscal 2001, the Company did not enter into any sale-lease-back transactions on behalf of the CarMax Group with unrelatedparties. The aggregate selling price of sale-leaseback transactionswas $12,500,000 in fiscal 2000 and $131,750,000 in fiscal 1999.Neither the Company nor the CarMax Group has continuinginvolvement under the sale-leaseback transactions.

10. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION(A) ADVERTISING EXPENSE: Advertising expense, which is

included in selling, general and administrative expenses in theaccompanying statements of operations, amounted to$44,912,000 (1.8 percent of net sales and operating revenues) infiscal 2001, $48,637,000 (2.4 percent of net sales and operatingrevenues) in fiscal 2000 and $50,042,000 (3.4 percent of netsales and operating revenues) in fiscal 1999.

(B) WRITE-DOWN OF ASSETS AND LEASE TERMINATION COSTS: Inthe fourth quarter of fiscal 2001, CarMax recorded $8.7 millionfor the write-off of goodwill associated with two underperform-ing stand-alone new-car franchises. In the fourth quarter of fis-cal 2000, CarMax recorded $4.8 million in charges related tolease termination costs on undeveloped property and a write-down of assets associated with excess property for sale at severallocations. The loss related to operating leases was calculatedbased on expected lease termination costs and costs associatedwith subleasing the property.

11. SECURITIZATIONSThe Company has an asset securitization program, operatedthrough a special purpose subsidiary on behalf of the CarMaxGroup, to finance the consumer installment credit receivablesgenerated by its automobile loan finance operation. This auto-mobile loan securitization program had a total program capacityof $450 million as of February 28, 2001, with no recourse provi-sions. In October 1999, the Company formed a second securitiza-tion facility that allowed for a $644 million securitization ofautomobile loan receivables in the public market. Because of theamortization of the automobile loan receivables and correspond-ing securities in this facility, the program had a capacity of $329million as of February 28, 2001, with no recourse provisions. InJanuary 2001, the Company sold $655 million of receivables inthe public market through an additional owner trust structure.The program had a capacity of $655 million as of February 28,2001, with no recourse provisions. In these securitizations, theCompany retains servicing rights and subordinated interests. TheCompany’s retained interests are subject to credit and prepay-ment risks on the transferred financial assets.

At February 28, 2001, the total principal amount of loansmanaged or securitized was $1,296 million. Of the total loans, theprincipal amount of loans securitized was $1,284 million and theprincipal amount of loans held for sale or investment was $12million. The principal amount of loans that were 31 days or moredelinquent was $18.1 million at February 28, 2001. The creditlosses net of recoveries were $7.2 million for fiscal 2001.

The Company receives annual servicing fees approximating 1 percent of the outstanding principal balance of the securitizedautomobile loans and rights to future cash flows arising after theinvestors in the securitization trust have received the return forwhich they contracted. The servicing fee specified in the auto-mobile loan securitization agreements adequately compensatesthe finance operation for servicing the accounts. Accordingly, noservicing asset or liability has been recorded.

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The table below summarizes certain cash flows received fromand paid to securitization trusts:

Year Ended(Amounts in thousands) February 28, 2001

Proceeds from new securitizations................................ $619,525Proceeds from collections reinvested

in previous automobile loan securitizations.......... $313,827Servicing fees received.................................................... $ 10,474Other cash flows received on retained interests*......... $ 39,265

* This amount represents total cash flows received from retained interests bythe transferor other than servicing fees, including cash flows from interest-onlystrips and cash above the minimum required level in cash collateral accounts.

In determining the fair value of retained interests, theCompany estimates future cash flows using management's bestestimates of key assumptions such as finance charge income,default rates, prepayment rates and discount rates. The Companyemploys a risk-based pricing strategy that increases the statedannual percentage rate for accounts that have a higher predictedrisk of default. Accounts with a lower risk profile also may qual-ify for promotional financing.

Rights recorded for future finance income from servicedassets that exceed the contractually specified servicing fees arecarried at fair value and amounted to $42.0 million at February 28,2001, and are included in net accounts receivable. Gains on salesof $35.4 million were recorded in fiscal 2001.

The fair value of retained interests at February 28, 2001, was$74.1 million with a weighted-average life ranging from 1.5 yearsto 1.8 years. The table below shows the key economic assumptionsused in measuring the fair value of retained interests at February28, 2001, and a sensitivity analysis showing the hypotheticaleffect on the fair value of those interests when there are unfavor-able variations from the assumptions used. Key economicassumptions at February 28, 2001, are not materially differentthan assumptions used to measure the fair value of retainedinterests at the time of securitization. These sensitivities arehypothetical and should be used with caution. In this table, theeffect of a variation in a particular assumption on the fair valueof the retained interest is calculated without changing any otherassumption; in reality, changes in one factor may result in changesin another, which might magnify or counteract the sensitivities.

Impact on Impact on Assumptions Fair Value Fair Value

(Dollar amounts Used of 10% of 20%in thousands) (Annual) Adverse Change Adverse Change

Prepayment speed ......... 1.5—1.6% $1,840 $3,864Default rate..................... 1.0—1.2% $1,471 $3,050Discount rate.................. 12.0% $ 890 $1,786

12. INTEREST RATE SWAPSThe Company enters into amortizing swaps relating to automo-bile loan receivable securitizations to convert variable-ratefinancing costs to fixed-rate obligations to better match fundingcosts to the receivables being securitized. The Company enteredinto nine 40-month amortizing swaps with notional amountstotaling approximately $735 million in fiscal 2001, four 40-month amortizing swaps with notional amounts totaling approx-imately $344 million in fiscal 2000 and four 40-monthamortizing swaps with notional amounts totaling approximately$387 million in fiscal 1999. These swaps were entered into aspart of sales of receivables and are included in the gain or losson sales of receivables. The remaining total notional amount ofall swaps related to the automobile loan receivable securitiza-tions was approximately $299 million at February 28, 2001,$327 million at February 29, 2000, and $499 million at February28, 1999. The reduction in the total notional amount of theCarMax interest rate swaps in fiscal 2001 and in fiscal 2000relates to the replacement of floating-rate securitizations with a$655 million fixed-rate securitization in January 2001 and $644million fixed-rate securitization in October 1999.

The market and credit risks associated with the interest rateswaps are similar to those relating to other types of financialinstruments. Market risk is the exposure created by potentialfluctuations in interest rates and is directly related to the producttype, agreement terms and transaction volume. The Companydoes not anticipate significant market risk from swaps, becausetheir use is to more closely match funding costs to the use of thefunding. Credit risk is the exposure to nonperformance ofanother party to an agreement. The Company mitigates creditrisk by dealing with highly rated counterparties.

13. CONTINGENT LIABILITIESIn the normal course of business, the Company is involved invarious legal proceedings. Based upon the CarMax Group’s eval-uation of the information presently available, managementbelieves that the ultimate resolution of any such proceedings willnot have a material adverse effect on the CarMax Group’s finan-cial position, liquidity or results of operations.

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Independent Auditors� Report

The Board of Directors and Stockholders of Circuit City Stores, Inc.:

We have audited the accompanying balance sheets of theCarMax Group (as defined in Note 1) as of February 28, 2001and February 29, 2000 and the related statements of operations,group equity and cash flows for each of the fiscal years in thethree-year period ended February 28, 2001. These financial state-ments are the responsibility of Circuit City Stores, Inc.’s manage-ment. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of mate-rial misstatement. An audit includes examining, on a test basis, evi-dence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting princi-ples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

As more fully discussed in Note 1, the financial statements ofthe CarMax Group should be read in conjunction with the con-solidated financial statements of Circuit City Stores, Inc. and sub-sidiaries and the financial statements of the Circuit City Group.

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial position ofthe CarMax Group as of February 28, 2001 and February 29,2000 and the results of its operations and its cash flows for eachof the fiscal years in the three-year period ended February 28,2001 in conformity with accounting principles generallyaccepted in the United States of America.

Richmond, VirginiaApril 2, 2001

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

First Quarter Second Quarter Third Quarter Fourth Quarter Year(Amounts in thousands) 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000

Net sales and operating revenues..... $625,741 $486,063 $673,561 $535,727 $561,693 $488,958 $639,996 $504,236 $2,500,991 $2,014,984

Gross profit............................................ $ 85,462 $ 61,996 $ 90,549 $ 63,780 $ 71,679 $ 52,728 $ 82,069 $ 61,861 $ 329,759 $ 240,365

Net earnings (loss) ............................... $ 13,944 $ 2,733 $ 16,271 $ 3,233 $ 7,568 $ (3,136) $ 7,781 $ (1,712) $ 45,564 $ 1,118

Net earnings (loss) attributed to

CarMax Group Common Stock... $ 3,535 $ 646 $ 4,126 $ 775 $ 1,920 $ (757) $ 1,974 $ (408) $ 11,555 $ 256

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Management�s Report

Board of Directors

The Board of Directors and Stockholders of Circuit City Stores, Inc.:

The consolidated financial statements of Circuit City Stores, Inc.and subsidiaries, as well as the financial statements of the CircuitCity Group and the CarMax Group, have been prepared under thedirection of management, which is responsible for their integrityand objectivity. These financial statements have been prepared inconformity with accounting principles generally accepted in theUnited States of America except for the Circuit City Group, whichhas accounted for its interest in the CarMax Group in a mannersimilar to the equity method of accounting. Accounting principlesgenerally accepted in the United States of America require that theCarMax Group be consolidated with the Circuit City Group.However, management feels the manner in which the Circuit CityGroup is presented more clearly indicates the performance of theCircuit City business. The financial statements include amounts thatare the best estimates and judgments of management with consider-ation given to materiality.

Management is responsible for maintaining an internal control structure designed to provide reasonable assurance that thebooks and records reflect the transactions of the Company and thatthe Company’s established policies and procedures are carefully fol-lowed. Because of inherent limitations in any system, there can beno absolute assurance that errors or irregularities will not occur.Nevertheless, management believes that the internal control struc-ture provides reasonable assurance that assets are safeguarded andthat financial information is objective and reliable.

The Company’s and the Groups’ financial statements have beenaudited by KPMG LLP, independent auditors. Their Independent

Auditors’ Reports, which are based on audits made in accordancewith auditing standards generally accepted in the United States ofAmerica, express opinions as to the fair presentation of the financialstatements in conformity with accounting principles generallyaccepted in the United States of America. In performing their audits,KPMG LLP considers the Company’s internal control structure to theextent it deems necessary in order to issue its opinions on theCompany’s and the Groups’ financial statements.

The audit committee of the board of directors is composed solelyof outside directors. The committee meets periodically with manage-ment, the internal auditors and the independent auditors to assureeach is properly discharging its responsibilities. KPMG LLP and theinternal auditors have full and free access to meet privately with theaudit committee to discuss accounting controls, audit findings andfinancial reporting matters.

W. Alan McColloughPresident and Chief Executive Officer

Michael T. ChalifouxExecutive Vice President, Chief Financial Officerand Corporate SecretaryApril 2, 2001

Richard L. SharpChairman

Alan L. Wurtzel (5)

Vice Chairman of the Board

W. Alan McCollough (3)

President and Chief Executive Officer

Michael T. Chalifoux (3)

Executive Vice President, Chief Financial Officer and Corporate Secretary

Richard N. Cooper (4,5)

Professor of Economics,Harvard University;Boston, Massachusetts

Barbara S. Feigin (4,5)

Consultant; Retired, Executive Vice President, Worldwide Director of Strategic Services,Grey Advertising, Inc.; New York, New York

James F. Hardymon (1,2)

Retired, Chairman and Chief Executive Officer, Textron, Inc.;Providence, Rhode Island

Robert S. Jepson Jr. (1,2)

Chairman and Chief Executive Officer, Jepson Associates, Inc.; Savannah, Georgia

Major General Hugh G. Robinson (Ret.),P.E.(2,4)

Chairman and Chief Executive Officer,The Tetra Group; Dallas, Texas

Walter J. Salmon (1,2)

Stanley Roth Senior Professor of Retailing, Emeritus,Harvard Business School;Boston, Massachusetts

Mikael Salovaara (4,5)

Partner,Greycliff Partners;Morristown, New Jersey

John W. Snow (1,2)

Chairman, President and Chief Executive Officer,CSX Corporation; Richmond, Virginia

(1) Compensation and Personnel Committee Member

(2) Nominating and Governance Committee Member

(3) Executive Committee Member

(4) Audit Committee Member

(5) Pension Investment Committee Member

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Company Officers

W. Alan McColloughPresident and Chief Executive Officer

Richard S. BirnbaumExecutive Vice President Operations

Michael T. ChalifouxExecutive Vice President,Chief Financial Officer and Corporate Secretary

John W. FromanExecutive Vice PresidentMerchandising

Ann-Marie Austin-StephensSenior Vice PresidentStore Innovation and Development

Dennis J. BowmanSenior Vice President and Chief Information Officer

W. Stephen CannonSenior Vice President and General Counsel

Fiona P. DiasSenior Vice PresidentMarketing

Philip J. DunnSenior Vice President, Treasurer and Controller

W. Austin LigonSenior Vice President Automotive

Gary M. MierenfeldSenior Vice President Distribution and National Service

Jeffrey S. WellsSenior Vice President Human Resources

Edward J. BrettVice President and Northeast Division President

George D. Clark Jr.Vice President and Central Division President

Michael K. FroningVice President and Southern Division President

Mario RamirezVice President and Western Division President

Mark A. ArensmeyerVice PresidentSuperstore Human Resourcesand Superstore Training

Keith D. BrowningVice President

David W. CecilVice President Merchandising

Joseph T. CipollaVice President Management Information Systems

Miles M. CircoVice President and Chief Technical Officer

Ann M. CollierVice President Financial and Public Relations

Benjamin B. Cummings Jr.Vice PresidentReal Estate

William C. DenneyVice PresidentGeneral Merchandise Manager

Douglas R. DrewsVice PresidentDistribution

Neal N. LappeVice PresidentProduct Service

Jerry L. LawsonVice PresidentCentral Division

Carl C. Liebert IIIVice PresidentCorporate Operations

R. Bruce LucasVice PresidentConstruction

William E. McCoreyVice PresidentManagement Information Systems

Kim D. OrcuttVice PresidentMerchandising

Michael T. RyanVice PresidentGeneral Merchandise Manager

Richard W. Souder Jr.Vice PresidentGeneral Merchandise Manager

Paul D. SwensonVice PresidentWarranty Administration

James H. WimmerVice PresidentStore Services

Blaine AltafferAssistant Vice PresidentMerchandising

Lisa J. BaldygaAssistant Treasurer

L. Dan BarzelAssistant Vice PresidentMerchandising

Daniel M. BenningAssistant Vice PresidentSouthern Division

Jay W. BertagnoliAssistant Vice PresidentMerchandising

Julie S. BilodeauAssistant Vice PresidentConsumer Insights

George T. Crowell IIIAssistant Vice PresidentCentral Division

Peter A. DouglasAssistant Vice PresidentSouthern Division

Sean K. EasterAssistant Vice PresidentConstruction

Victor M. EngesserAssistant Vice PresidentMerchandising

Linda N. EnglishAssistant Vice President andAssistant Controller

Carol K. FullerAssistant Vice PresidentMarketing

Stanley L. HellerAssistant Vice PresidentReal Estate

Henry HewittAssistant Vice PresidentMerchandising

Eric A. Jonas Jr.Assistant Vice PresidentCorporate Human Resource Services

Linda L. LubeckiAssistant Vice PresidentMerchandising

Janice A. McNeeAssistant Vice PresidentStore Innovation and Development

Douglas T. MooreAssistant Vice PresidentMerchandising

John D. NelmsAssistant Vice PresidentManagement Information Systems

Joseph E. OrenAssistant Vice PresidentManagement Information Systems

Kent E. RichardsonAssistant Vice PresidentStore Innovation and Development

Elaine M. SchrammAssistant Vice PresidentLoss Prevention

Andrew P. ShulklapperAssistant Vice PresidentMerchandising

Frank X. SmalaraAssistant Vice PresidentManagement Information Systems

David M. UrquidiAssistant Vice PresidentWestern Division

Robert T. WalkerAssistant Vice PresidentCentral Division

CARMAX OFFICERS

W. Austin LigonPresident

Keith D. BrowningExecutive Vice President andChief Financial Officer

Thomas J. FolliardExecutive Vice PresidentStore Operations

Michael K. DolanSenior Vice President and Chief Information Officer

Joseph S. KunkelSenior Vice President Marketing and Strategy

Edwin J. HillVice PresidentService Operations

Scott A. RivasVice PresidentHuman Resources

Angela C. SchwarzVice PresidentCarMax Auto Finance

Fred S. WilsonVice PresidentStore Administration

William C. Wood Jr.Vice PresidentMerchandising

David D. BanksAssistant Vice PresidentManagement Information Systems

Laura R. DonahueAssistant Vice PresidentAdvertising

Randall J. HardenAssistant Vice PresidentMarketing

Barbara B. HarvillAssistant Vice PresidentManagement Information Systems

Robert W. MitchellAssistant Vice PresidentConsumer Finance

K. Douglass MoyersAssistant Vice PresidentReal Estate

Richard M. SmithAssistant Vice PresidentManagement Information Systems

Circuit City Stores, Inc.

9950 MAYLAND DRIVE

RICHMOND, VIRGINIA 23233-1464